If you are active in any type of business, then you already know the importance of a business budget. A business budget is the only way to plan for the future, and planning for the future is the only way a business will get past the initial stages, achieve growth, and avoid the stagnation which always leads, in the end, to business collapse.
However, much less well understood is what a business budget should contain, what you should actually budget for and what, specifically, a budget for a small business should look like.
It could even be argued that a proper business budget is in fact much more important for a small business looking to avoid stagnation than it is for a larger business with a lot of spare funds. In fact, this makes total sense – when resources are limited, spending needs to be very strictly controlled. Nevertheless, at this point comes an especially important consideration.
There is a temptation with small businesses to simply aim at meeting expenses, month on month, and staying afloat. Almost paradoxically, this is not effective for keeping a small business afloat.
If the expenses every month are only just met, then growth ceases to be an option. The alternative is stagnation, and in time this is sure to see a business go under. Therefore, a proper business budget is not only about meeting expenses, but it also needs to be orientated towards growth. Furthermore, you should factor into the budget a means of being able to meet greater expenses and to make investments in the future. This needs to be factored in right from the start.
Another reason why a business budget is necessary for a small business is that it can be a useful tool for ameliorating any cash flow issues, one of the major problems which small businesses face.
A company has a cash flow problem when they cannot meet every financial obligation at the time it needs to be met. Overall profits might exceed total expenses, but there is a cash flow issue if you are ever waiting for money to come in before an expense can be met.
Moreover, it isn’t only that growth is impossible without a healthy cash flow but there’s a real risk of company going under too. Thales Financial, a company specializing in invoice factoring for small businesses, say that invoice factoring can be a way of staying afloat while cash flow is poor, but business growth is only possible once such services are no longer required – or only needed occasionally.
What Should the Budget Contain?
So, what does a good budget for a small business look like? Here are some elements that should certainly be included:
This is the amount you expect to make from the sale of goods or services. It is a projection, but a reliable one if enough past sales data is factored in or if industry averages are deferred to.
These are the financial obligations that regularly recur and don’t change. This is a static figure, so it is one of the easiest to include in your budget.
Variable costs are important if a budget is going to be conducive to business growth. Variable costs are those expenses which might arise from investment after an increase in sales.
You can see above for the importance of this. How to calculate it is to subtract the funds available at the beginning of a set period from that available at the end.
Ultimately, the most important thing about a budget for a small business is that it is oriented towards growth.