Budget Planning

From LoveToKnow Business

Budget planning is also known as forecasting, a process every small business should review at regular periods: monthly, quarterly or annually. A business budget allows you to see where you’ve been and where you’re going in terms of costs and cash flow. While forecasting is a part of every business plan, once you’ve established the guidelines for your particular business, you can plug in the figures and have a reliable tool that can help you prepare for the future.

The Importance Of Budget Planning

One of the seven danger signs of a failing business is a failure to plan. Unforeseen events always occur, from sudden influxes of new technology that can either wipe out current markets or create a new markets overnight, to unforeseen cost increases due to vendor mergers and acquisitions. As a business owner, you can’t think that you can deal with the problem later. Implementing a working budget and sticking with it is the best thing you can do to plan for unforeseen contingencies.

Percentage Budgeting

There are two types of budget planning models that you can use:

Percentage Projections

The first is an easy method where you make a percentage projections about rising costs from one year to the next. For example, your phone costs, including monthly service fees and advertising, should be expected to increase by five percent or so each year, assuming your ads remain the same size, and you do not install additional phone services.

Advertising and promotion costs fit into this same category, called variable expenses. A fixed expense, like office or facility rent, should remain the same until the end of your rental agreement, when you can expect a rent increase. You can also assign a fixed increase for disaster preparation, using the figures recorded in your business plan and increasing them accordingly to accrue an amount that will cover the costs of rebuilding, should disaster occur.

Zero-based Budgeting

Zero-based budgeting operates on a different principal. In this system, you start at an selected point for a particular category of expenses and take last year’s total expenses as the place you want to begin. For example, say your advertising costs ran $25,000 last year. Zero-based budgeting forces you to review all of last year’s expenses related to advertising, to see where expenses could be cut, and mistakes made last year that you want to avoid this year. Instead of increasing your expenses by a flat percentage as in the percentage budget method, you find areas of cost overruns and waste that you can eliminate. Instead of increasing your advertising expenses by 10%, you could actually decrease your costs by 5% to 10% because of this cost review process. Zero-based budgeting makes you think outside of the box.

The Biggest Mistake: Not To Budget

There are several small business owners who mistakenly think that they do not need a budget in order to effectively manage their business. Nothing could be further from the truth. Not knowing what’s happening to your cash flow is the easiest way to quickly head down the road to financial disaster. Most millionaire small business owners work with budgets for a simple reason. Talk to one and he or she will tell you that they still use a budget because a budget allows them to keep a finger to the pulse of their business.

Many small business owners also think that the only time they will need budget planning when their businesses are new. This is a mistaken assumption. Talk to a millionaire owner and he will tell you that if you can’t manage a budget to control your expenses now, it’s doubtful that you’ll be around later as a business owner but working in someone else’s business where the owner tightly managed his finances.


 


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