As the year comes to an end, many business owners are looking back on the volatile twelve months we have just endured in an effort to learn lessons and plan for the future. This period offers an opportunity to take stock and consider potential improvements for the coming year.
Budget planning is a fundamental aspect of this process but it can be a daunting task, particularly if you haven’t carried it out before. Here are our top tips to help make it easy to produce a successful business budget for 2010.
How many budgets will you need
Depending on the scale and nature of your business, you may require more than one budget. Many small businesses complete just one budget, outlining the cash required for the running of all aspects of the firm. This may well be adequate if yours is a very small business carrying out just one type of work.
However, it is very common for firms to draw up multiple budgets, each governing a different department or set of activities. For example, you may have a marketing budget, a business development budget, a human resources budget and so on.
Consider whether your business would be better served by a single overarching budget, or by a number of different plans.
Look back to look forward
By looking back over your figures for the past year you can start to develop a rough idea of the costs you will incur over the next twelve months.Your costs can be split into three distinct groups: fixed costs, like rent and wages; variable costs, such as the cost of materials; and capital costs, such as the purchase of new plant or computer equipment.
Looking back through past receipts can be useful in drawing a picture of your expected expenditure. But remember – 2009 was a particularly volatile year in terms of pricing. The coming year is likely to see a significant shift in the cost of many things on which small businesses rely. You should therefore make sure that you include an adequate margin of error in your budgets.
Which brings us neatly onto our next tip…
Concentrate on contingencies
The contingency fund is perhaps the most important part of any budget. This is the cash you will fall back on in the event that your costs are higher than expected, or that you do not meet your sales goals, and is absolutely vital for the continued stability of your business.
A sensible size for a contingency fund will often depend on the type of work your business is carrying out. For example, if the price of the raw materials used by your firm fluctuates significantly, you may require a very large fund. It is generally thought that you should set aside no less than 10 per cent of your total expected expenditure for emergencies.
Unrealistic forecasts are perhaps the most common – and most damaging – problem with budgets. Your forecasts may be wrong for a number of reasons; for example, you may predict unrealistically high levels of sales, or you may under-budget when it comes to expenditure. Both problems have the potential to result in significant cashflow difficulties – and this is the primary cause of business collapse.
If you are in doubt about the reliability of your forecasts, you must always err on the side of caution. Increase the size of your contingency fund or, better still, skim a few per cent off the top of your sales forecasts and add a few per cent to your predicted expenditure.
Benchmark with your budget
Aside from providing you with a map setting out your intended course for the coming business period, your budget can also be a useful tool for benchmarking the long-term performance of your business.
Comparing your budgets over a number of different periods can provide a useful way of measuring the progress of your business. For example, it would be generally expected that your projected sales should be increasing year on year. If this is not the case, you should attempt to identify the reason. Similarly, if you can see a significant increase in costs you should ensure that this is offset or absorbed.
Finally, you may find it useful to compare your projected and actual figures to those from other businesses in your sector. This can help illustrate how well your business is performing in relation to your closest competitors.
Although budgeting can seem like a long and boring process, it is an absolutely vital aspect of the management of a successful business. Your budget will ultimately play a significant role in the success and stability of your business over the course of the year. You must make sure that you get it right first time.