Now is the perfect time to set a budget for the new year. Yes, some business owners think they don’t need to set a budget – they’re either too spontaneous to adhere to a strict spending plan or believe they simply don’t need one.
Either way, business owners should recognize that budgeting is planning, and every successful organization has plans. What’s key is aligning those seemingly distinct objectives. And budgets don’t have to be strict, all-encompassing doctrines – they can be flexible and serve as more of a guide for your business.
The truth is that small businesses will have unforeseen expenses and random forces to consider, so the idea of establishing an unalterable budget seems silly. A loose budget will also help ensure that your earnings are on par with your aspirations and that you are in control of costs related to that income.
“Firstly, you need to know how many items/hours you must sell per month to reach your goal income,” writes Tracey Loubser for eFinancial magazine. “This is phased over a 12-month period. If you are currently not able to work out this part of how you will earn your goal income, then you are not setting your business up for success.”
It’s also important to match costs related to your goal income, Loubser adds. Service-based startups will have to direct costs related to each hour that is charged. Owners should work out exactly how much each hour will cost them, as this will not only ensure an appropriate revenue structure, but it will also help inform pricing strategies and highlight available capital.
“By having a firm plan in place you can easily see, over the year, in which months you are making a profit and you can track this against each individual month to see how your business actually performed in relation to your budget,” the source points out.
“When you are able to see what you planned and what actually happened, you will then be able to easily identify any differences – where they occurred, why they happened and how you can adjust your budget or spending to get on track.”
As your operations begin to expand, the need for a budget – or at least proper organization of finances – will become essential, as lenders and investors will demand to see a thorough list of revenue streams, finances, profits and, yes, your ability to adhere to a spending plan. No investor will trust in an entrepreneur or business owner who can’t distinguish his or her finances and abide by a plan.
Of course, this doesn’t discourage the idea of spontaneity. The ability to improvise and work with a given situation is a critical entrepreneurial skill. But business owners need to show they are able to work off of a plan when one is given to them.
