For most small business owners, budgeting is a financial process that is strictly limited to figuring out ways of getting the cash to pay next week’s salaries. There are so many financial problems to be dealt in any given week that finding time to think of or do any short-term or long-term financial planning is difficult. But the failure to plan financially could mean that you are unknowingly and unwillingly planning for your business to fail.
One of the most powerful and important financial tool available to the small business owner is business budgeting. Simply put, it is maintaining a good short-term and long-term financial plan that helps you in controlling the cash flow of your business instead of it controlling you.
How to budget?
In the initial start of your business, you need to make a reasonable number of assumptions about the business when you are establishing your budget. Some important questions to consider are:
1. How much sales can be achieved in one year?
2. How much will your sales grow in the coming years?
3. How much will your operating expenses be?
4. What is the number of employees that you will need? What will be their salary? What will be your own salary?
5. What is the equipment needed at the start of the business? What will be its total cost? Will you need to purchase any additional equipment in the coming years?
6. What are the payment terms offered to customers, if you will sell on credit? What is the payment terms your suppliers giving you?
What to budget?
Most financial budget plans have a provision only for the income statement. However, it is equally important to budget the balance sheet, as well as the income statement. This will enable you to consider the possible cash flow requirements of your entire business operation and not just the expenses and income.
In addition, if you are budgeting the income statement only, a full analysis of your complete financial picture is not allowed. For example, if you are considering purchasing real estate for your business operation, you need to work out the effect on your cash flow by the debt service.
In future, only a budget can help you to determine the probable effects of expanding your business facilities and the resulting debt service or higher rent payments. No matter if you are doing your budget manually or with the help of software, it is best to take the timely advice of your CPA in the preparation of the initial budget.
