Budgeting and the SME: What to do

I recall once saying to an audience that many people typically attribute budgeting to poverty and lack. Here’s the thing; a number of business owners feel that to plan before spending indicates that the business is not doing well. It is an affront to many that they should plan before spending when all they would rather do is get on that mobile app and transfer funds as they feel moved to.

Truthfully, this is hilarious and it is the very reason why people look with disdain on the so-called ‘one-man-business’. The very reason you are unable to retain the best hands is because they know that you have a culture of doing things on a whim. No plans, no co-ordination and more knee-jerk reactions.

We have talked and heard about business structure for the longest time and nothing really has changed. This can easily be demystified if little steps are taken in the right direction. One of such crucial steps is having a culture of working with budgets in your business.

First Things First

You need to review the previous year’s performance. You can’t do this in your mind’s eye. Get your Management Accounts prepared and look at each item line by line, starting from your Revenue composition and then your various Direct Cost elements as well as overheads (those items you had to spend money on whether or not revenue was generated). Now, reviewing your previous year Management Accounts allows you to see at a glance what areas you missed it and then informs the basis for your new year plan (budget). In this review, you want to ask yourself a few questions that would also inform how you plan funds for the rest of this year.

Some questions include:

1. How much did our marketing expense contribute to sales?

2. How much of revenue was spent on staff cost?

3. How much was our total overheads as a proportion of revenue generated?

4. What expense item made up the bulk of our total expenses and why?

5. What was our net profit as a proportion of total sales?

These are just a few questions and you could come up with many more. An understanding of the specifics of the past will cast some illumination on the plans for the present and the future. It is imperative that you avoid sweeping generalisations based on feelings. What do the figures say and why? The answers would be your ultimate baseline for the imminent budget.

Also note that your review could reveal non-performance and this should not discourage you, but spur you on to make adjustments in the current period. You will need to query what activities translated to the numbers that are revealed in this review so that you know what activities you want to replicate and the activities you will need to avoid altogether.

Next Steps

You can decide to embrace the budget by using an incremental approach or go fully aspirational. It is really up to you as a business owner. What would give you the utmost satisfaction? What is possible within your market? Are you willing to do what it takes to drive the revenue goals you want to achieve? Are you willing to starve certain expense items to feed others that would facilitate increased revenue? To thy own self be true. The answers lie within you.

Here are just a few pointers to getting your budget underway:

1. Ensure your budget is documented. It cannot sit in your imagination or mind’s eye.

2. Ensure you communicate the budget to your staff. They need to know what you are pursuing.

3. Make sure that you consider the cost of the activities required to derive your revenue goal and include them in the appropriate expense lines

4. Monitor performance at least monthly. Do not wait one whole year to see that you are over spending and not getting commensurate returns on your expenses.

5. Always investigate variances.

If you have tracked the past previously, you are more likely to have a realistic budget for the current year. It is not impossible to create a budget if you have not tracked previously. It is only more difficult to establish a feasible starting point. Regardless, you need to get your activities and plans translated to a budget today.

What do I use to create My Budget?

A simple spreadsheet can be used to articulate your plans for the year. Try as much as possible to be granular and avoid hiding things under Miscellaneous Expenses. You can include a line for contingency, which may vary from 5 percent to 15 percent of the total itemized expenses.

Finally, no matter how prosperous your business gets, have your plans written out. They may alter as future conditions change, but they give direction to the business activities, eliminate waste and time wasters. Also remember, that whatever doesn’t get measured doesn’t get done.

Here’s wishing you a year of great plans and the efficient implementation of those plans!

Madojemu is managing director of Pundit Bookkeeping Services; a company bridging the gap between emerging businesses and professionally prepared accounts. Jovita seeks to empower young businesses with financial intelligence, for business growth and sustainability. He can be reached via jmadojemu@punditbookkeeping.com