Creating a Budget
For many of us who were employees before we became SMME’s or Entrepreneurs, creating a budget was something that we perhaps did on a monthly basis. It was all that we needed because we were assured of a fixed income at the end of each and every month.
As an SMME however, especially when we are starting out, we do not know what to expect. We can always theorize about what we would like to have coming in as income, but we do have quite a bit of control over what will be going out. It is really is a good idea to know exactly how much your need to be coming in to be able to pay the basic bills. So creating a 12 month budget is a good idea.
Having a 12 month budget will allow you to plan and strategize what you need and want to do for the following twelve months. Creating a 12 month budget is not something that you should do when you have some spare time, but rather something that you should allocate time to do. It should be seen as something that is critical to your business, rather than something that is viewed as a waste of time. It will assist you in ensuring that your business has a manageable and sustainable financial plan.
For me the challenge always is just to get started. If you are not sure about what you are doing, it is really easy to procrastinate. So book it in your diary and just get going.
First of all you need to know what your profit/loss format is. Don’t panic – it is not as scary as it sounds. You start with your income – take what you charge for your product and/or service, less your cost of sale (which is the cost of the goods sold or the cost to you, in order to supply the service), less your overhead expenses. This is your net income (also known as profit).
Don’t forget to list all of your expenses or the expenses that you expect to have during the next 12 months and also your projected income. Then in order to ensure that you don’t overstate your income, it is always a good idea to validate it. So for example if you predict that your income in July is going to be say R20 000.00, you need to list how that R20 000.00 is made up. In other words, what you are going to do in order to bring that money into the company? Be careful that you don’t underestimate your expenses – be realistic about your expectations – it is always better to come in under budget on your expenses and over budget on your income than the other way around.
Remember to compare your actual monthly figures to your predicted theoretical figures. This will be of real value to you, firstly to ensure that you keep your sales figures up and your expenses down, and secondly it will assist you in the compilation of the following year’s budget.
As a business owner myself, I am all too aware of the demands on my time and how critical it is to manage my time effectively. That said, I have learnt the hard way just how costly it is, both financially and also from a time point of view, if the financial side of the business is not managed effectively and properly.
If numbers and the financial side of things is not one of your strengths, I promise you it is in your own best interests to find someone (either an employee or a bookkeeper, or better yet an accountant) to assist you; or get yourself on some sort of “Financial Literacy” workshop so that you have the basic knowledge of what is happening in the financial side of your company. Believe me: without it, you will be lost and that is surely the quickest recipe for disaster.
You are responsible for the financial wellbeing of your company – at the very least you should be able to have a basic understanding of it.
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