The word budget has a stigma attached to it and it isn’t always viewed in a positive light. Businesses just like individuals need budgets too. While business budgets and personal budgets have a lot in common there are a few things that will be approached differently. If you’ve never had to do a business budget it’s time to think about doing one and we are going to look at some things you need to know to understand the budgeting process. Remember the budget is for you!
A budget is an estimate of income and expenditure over a set period of time. In the case of a business, the budget is the plan for income and expenditure over a defined future period. You can have budgets for the year, quarter or month, a lot will depend on your operation. It is common practice to break down annual budgets into quarterly or monthly budgets. In English, a budget is a roadmap or plan for the money you expect to make and what you plan to do with it. So a budget is not an unrealistic set of figures meant to impress would-be investors or financiers but rather a realistic and comprehensive road map of where you’re going and how you plan to get there.
When making a budget one thing you want to do is provide detail. You see if a budget is a plan or a map the degree of detail in the map will determine its reliability. While I’m a great fan of the “plans are made to be changed” ideology if you’re going to wing it and estimate at every turn then you might actually be better off not having a plan. So when drawing a budget you want to use realistic figures and these are best drawn from what has already. Yes, I know your favourite motivational speaker said the past does not equal the future but we have no better source of information for this purpose. If you do not have a history to refer to then you will need to take an honest look at all that is involved. All costs count, even the smallest costs. Especially the smallest costs.
Prudence is more of a concept than a specific instruction but to put it in a statement you could say assume the worst case. It’s not as bad as I make it sound. Prudence holds us to always look at our projections with pragmatism, it is therefore not what we hope that we put into our budgets but we can reasonably expect. We may have a great product that customers love but expecting a million customers next month might not be reasonable. On the other hand, we can reasonably expect that our internet service provider will charge us for a month of service. We can reasonably expect to have the same number of customers we had last month. We can reasonably expect price inflation in Zimbabwean dollar terms.
If you are not of the technical persuasion when it comes to numbers and they scare you or otherwise put you off you can still look at budgets and make sense of them. You can even make budgets. I said budgets are plans and what are plans if not stories of the future? Budgets do tell stories and the story is plain to see if you understand the business model. And you should because it’s your business model. You plan to buy 1000 units of product X at $1 each and it will cost $100 to get them delivered to you. You will spend an extra 5 cents per unit on packaging ($50) and plan to spend a total of $300 on marketing to sell the 1000 units at $3 per unit. Of course, your story should include a lot more detail but you are really laying out a story. You don’t need to be a chartered financial analyst to know when a story isn’t quite adding up, pun intended.
Now comes the fun part, drawing up a budget. I often get asked the format for a budget. My answer is the same format as your business accounts. If you haven’t drawn up business accounts before the process would involve sorting through your income and expenditure to categorise your expenses then arranging the categories into a story. If the business is new you can either look at templates for similar businesses or look at your business model for guidance. Ultimately your budgets should match the activities that you will carry out in the course of business. There are two approaches to budgeting, top-down and bottom-up. Top-down allocates available resources to your activities and suits cases where resources are limited. Bottom-up budgeting looks at the needs of the various activities and “requests’ money for the activity. This works best when resources are abundant.
Approaching business budgeting can seem like a huge task but it is really not. If you’ve been operating then the purpose of a budget is to capture what you have been doing to improve on it. If you are new to the business you will need to consult a well-written business plan for a realistic template for your business budget.