A business budget is one of those subjects that is often ignored or forgotten altogether. That is, until a situation arises like not having enough money to fund the operation or not spending enough money to take advantage of an opportunity to increase revenue.
Many small business owners do not take the time to use a basic tool that forecasts when and how cash flows through their business. Numerous lenders now require small business borrowers to provide three years' budget projections based on the results of receiving a loan. These projections will show how a loan payment affects monthly operations and how the loan supports expansion and growth. Supporting information may also be requested in the form of previous years' tax returns and monthly income statements. If these are not available, contact a CPA or bookkeeper for assistance.
A good way to begin the budgeting process is to borrow components from a standard business plan narrative. It should include a mission statement, description of the business, description of the market, an overview of the competition, and the company's strategic plan to achieve its goals. This part of the process should include details on how sales are recorded and how cash is collected. If sales and collections fluctuate due to economic conditions, it should be explained. Expense details should show how and when bills are normally paid. It may be helpful to include charts or graphs if trends can be established.
The owner should spend time and effort to track all line items and be sure they are essential to the company's operation when reviewing expenses. Special attention must be given to fixed expenses versus variable expenses. Most importantly, the budget process is only useful if it is updated regularly and used to forecast monthly expenses and track the actual expenses. While it may seem tedious, a budget will help manage cash flow, guide business spending decisions, and show the return on the owner's investment and work.
A budget is an indispensable tool for converting plans into reality. By knowing where one has been, it is easier to see where one is going. Planning on paper first can minimize the risks associated with any business. A good budget can build morale by helping the business owner organize, communicate and motivate employees to do their part in achieving the company's financial goals.
Gordon Smith is a business specialist at the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.nmsbdc.org/clovis