Wednesday, November 7, 2007

Making a budget for your small business

Budgeting is not just an art, it is a learning process in itself. A well made budget is critical to the survival of any business. It tracks the flow of finances and provides insight into those areas where there is excessive expenditure, thereby allowing an opportunity to make corrections.

A small business can make budgets at different levels – one for the business as a whole, or for special projects, for example, a marketing campaign. Budgeting is a complex exercise, and is always subject to revision since it has to reflect ground realities. Therefore, it must be looked at as the first step towards understanding the financial position of the business and not a be-all.

The following tips may come in handy for a small business owner about to embark on his or her first budgeting exercise:

Err on the side of caution. Keep revenue expectations low and overstate costs. Remember, there will always be that odd contingency that will suck extra funds from the system.

Favor business growth over cost control. There will be times when you need to spend more than what you initially intended on a specific activity. If that is going to contribute to the enlargement of the business, go for it. A budget must not limit the prospects of your business; however, use this as a learning to be more accurate in your future estimates.

A budget, however well made, is good as naught if not monitored closely. When expenses come close to the pre-set limits, act quickly to see whether they need to or can be contained.

Watch the cash flow, which is even more important than profit. A business that spends more frequently than it collects is heading towards a tight spot. Therefore, while making revenue projections, bear actual credit terms in mind. It is worth closing a contract at a lower price on cash and carry basis, versus a high price-long credit option.

Budget for contingencies, and keep adequate liquidity to meet those emergencies.

Finally, be realistic. Costs will go up, some customers will not pay and a few orders may not materialize. A well made budget must recognize these realities, yet must not be so “easy” that it throws no challenge to the management.

1 comment:

lucy spears said...

Budgeting is very important for every business. Budget should be proper and everything should be included in Budget. Thanks for sharing this information with us.

Keep sharing...

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