Budgeting Tips for the Local Business Owner

 “It’s an outline of expected expenses and revenues.  A budget details the portion of business funds that has been earmarked to be borrowed, saved or spent.”

From experience, both in business and in our private lives, we know that drafting a budget is an integral part of any success. Budgets are not useful for business enterprises only; they are indispensable tools for financially disciplined individuals as well.

We all know that the primary purpose of any business is to maximize profits.  Many businesses fail to do this, because they fail to manage their cash flow efficiently.  A business cannot survive, let alone thrive, without proper cash flow management.  A budget is one such mechanism that all businesses need in order to optimize the flow of cash into, and out of the business,  thus, ensuring that the daily operations of the entity are not abruptly stopped by a lack of funds, due to poor financial planning.

When drafting a budget, always make projections of the expected income, expenses and savings for a predetermined future period, for example, 3 months, 6 months, or 3 years.

Budgets can serve as a planning tool or as a control measure, depending on your particular needs.  You must estimate the expected income for a certain period.  Based on the organizations objectives, you must decide how much of the revenue is to be saved and how much will be spent.

• Decide what your financial needs will be in the respective period. Spread the expenditure in a manner that will ensure you don’t run out of cash before the period is over.

• Always have a reserve fund in case of unforeseen emergencies.

• If you sell on credit, intensify the debt collection process. Ensure that you always have a healthy surplus of cash.  This will allow you to take advantage of specials and other discounts offered by your suppliers.

• If you buy on credit, try to maximize the terms of payment. Don’t pay suppliers before it’s necessary.  Don’t wait ‘til it’s too late either.  You will be penalized for paying late, and consequently lose the supplier’s goodwill.

• Always measure the actual results of income and expenditure for the period against the estimated figures for the same period. Find ways to narrow the gap.

Separate fixed expenses from variable expenses. This will make the projections more accurate and will help you to control costs.

When drafting a budget, I suggest you adopt the principle of prudence.  This prudence principle says, “In case of uncertainty, you must put yourself in the weaker position so that actual results don’t leave you worse off than you expected”.  This means you overestimate your expenses and underestimate your income. This means that things will likely not be worse than you expected, they’ll be better, and you’ll have more cash flow to work with. In summary, prudence is a way of budgeting that ensures (or at least tries to ensure) you don’t come off worse than you expected.

It is always better to have some money left over rather than to run short and end up having to borrow from the bank, at huge interest rates, just to cover the shortfall.

• Identify your long-term spending objectives;

• Identify the steps required to reach the stated objective;

• Identify your current spending patterns; and

• Realign your current spending habits to meet the action steps required to reach the long-term objectives (that means spend less than you earn and redirect the money left over towards your stated objectives).

Now, this will probably not turn you into a Warren Buffet, but it’s a good start for most of us who are starting from a position of weakness. We first have to conquer the demons inside our heads before we can even consider conquering the world. Poor spending habits is one such demon. And if you can’t get your own spending under control, what makes you think you’ll be able to run a multinational corporation?