SBC19 – Why budgeting is a vital skill for today’s business owner

For some the mere mention of the term “budgeting”can be enough to turn them off, “something big companies do but not me … I’m just a small business”. We hear this a lot when we speak to small business owners but see it as a challenge!

Here are three reasons why having a budget is important.

  1. It sets a yardstick against which you can monitor how your business is performing.
  2. It helps you control your costs.
  3.  It helps you predict how much cash you’ll generate.

A performance yardstick

Sitting down each year and sketching out how you’d like your business to perform the following year is a great way of starting a business planning process. Find a copy of last years profit and loss account and then write over it what you’d like next year’s numbers to look like. Reflecting on last years numbers is a great starting point and always leads to more searching questions that can then be investigated, researched and built upon.

Control costs

Marginal gains is something not just for cycling teams. Small incremental improvements across a lot of areas can result in larger gains overall. You can use this approach with your overheads. By looking through your accounts, and the detail behind them, you can identify laziness, costs that just increase year on year because you don’t have the time to review them and spot that 5% increase that wasn’t agreed. A business with overheads of £100,000 that identifies a 3% overall saving generates £250 per month more cash.

Cash predictions

Businesses fail because they ultimately run out of cash. Therefore, understanding how much cash you have now, how much you expect to generate, and therefore how much you might have in the future, is a vital skill for today’s business owner. For small businesses that don’t have complex flows of cash through their systems a budget can provide a great guide as to what cash might be generated. This then provides a guide as to what can be invested in new equipment, that new marketing campaign or how much you can spend on next year’s holiday.

OK, you’re convinced so where do you start? Here are two tips to get you going.

  1. The first stage is to dust off a copy of last year’s set of accounts or, if you have reliable management accounts from your accounts system, this year’s current data. Find the profit and loss account and start to think about what might change. What are your plans for the business and what extra costs might be incurred, or how many more sales might you make?
  2.  Focus on your key expenses, the big ones, and look through the detail behind the numbers. This might involve reviewing a summary in your accounts app or looking through invoices. Make a list of the changes you want to make and then update your summary so you can see the cumulative impact on overall profits. Then start to work through them to make the budget come alive.

We hope you’ve found this introduction to budgeting interesting. Creating a budget can really help you understand your business through the numbers in your accounts.

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