Every small business prepares a budget on an annual basis. For some companies, this exercise provides a dynamic and powerful tool to monitor financial and business performance during the course of the year.
But for other firms, preparing a budget is merely a routine activity that is carried out without much thought or deliberation. The companies that adopt the latter approach are losing an opportunity to plan and grow their businesses in a structured manner that allows corrective action to be taken as the year progresses.
How can a business enterprise use a budget to increase its revenues, control its costs, and ensure its success in a competitive market? Here are a few points to keep in mind.
Does your budget take the risks that your business faces into consideration?
Paul Cho, managing director of Headway Capital, points out that every business venture faces risks and small business owners need to factor these in when planning for the year ahead.
Some businesses operate in an area that is prone to natural disasters, others rely heavily on seasonal labor. Company owners should map out the threats that they face and work out how they will tackle various contingencies.
A budget will give you a sense of direction and purpose
If carried out diligently, the budgeting exercise will help you decide on your strategy for the year. If you are planning to increase your turnover by 25%, will you do it by selling more to your existing customers or by adding new clients? Will you try and enter new markets or launch additional product lines?
It is essential that you draw up a monthly plan and review it periodically to see if you are on track to meet your goals.
Above all, remember that your budget is not cast in stone. Being flexible about your targets is important. Victor Butcher, of Butcher Financial Services in Memphis, Tenn., a former president of the Tennessee Society of Certified Public Accountants’ Memphis Chapter, who advises small businesses, says in Inc.com, “… be prepared to make adjustments to your budget as the year progresses.”
“You may have set your sales figures too high when the economic slump hits your business. Or, conversely, you may land a client that doubles your business.”
If necessary, get help
Small business owners are usually very knowledgeable about the industry that they operate in and the customers whom they sell to. But they may require the assistance of a professional for carrying out a comprehensive budgeting exercise.
Writing in Entrepreneur, Joseph Benoit advises business owners to consult a trusted CPA, financial advisor, or banker to help them create a budget. The advice that a professional provides could prove invaluable.
A budget is a roadmap for your business
A well-thought-out budget that is reviewed at monthly intervals will tell you if your business is likely to meet its revenue and profit targets. It will also provide you with insights about the areas that you need to concentrate on to improve overall performance.
Every business owner should ensure that regular budget reviews are conducted and that the company’s key people are involved. This practice will have a significant contribution to the success of your business.
Ravinder Kapur is a business operations writer at Aepiphanni, a small business operations and strategy consultancy that exists to help small business owners CREATE | DESIGN | BUILD extraordinary businesses. He is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry for more than 30 years. His finance expertise includes the commercial vehicle, automotive, and construction equipment sectors, as well as corporate finance. His experience in these disciplines has included business development, credit analysis, risk management and financial recovery. In addition, he worked extensively in corporate finance recoveries and was involved in several large value arbitration cases.
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