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Why your budget is the most critical part of your businesses success

February 10 2020

Why your budget is the most critical part of your businesses success

Managing finances is hard. And if you have started a business, it’s likely that you’re highly skilled in some areas - but that does not mean that one of those areas is finance. Not everyone is born to be an accountant - and that is fine because preparing and maintaining a good budget is not something that only accountants can do. And not being an accountant is certainly not an excuse to neglect the financial management of your business. After all - without money, do you even have a business?

In a 2018 survey by Clutch, 74% of businesses with fewer than 10 employees did not prepare and follow a budget. With nearly 80% of small businesses failing within 5 years, it is vitally important that we give ourselves the best shot at bucking that trend.

Essentially, a budget is about telling your money where to go, rather than wondering where it went. Here are 7 tips for preparing a good budget:

A budget must be realistic.

The budget process is not about creating good-looking numbers. They need to be numbers that are realistically achievable. If your sales have never crossed the R500k mark in a month, it is probably unrealistic to budget R700k. If your business is in manufacturing, it is unrealistic to budget for a stable electricity price when we know that it is increasing. Your budget needs to reflect something that is possible to achieve.

A budget is not something that is done once a year

Unless you have a crystal ball, there is no way you can accurately predict how the next 12 months will unfold.

A budget is a moving, living document that needs to be updated for any and all changes that occur. If you lose a client - your budget must change. If you gain a client, you need to assess what impact that will have on your cost structure and if it will change your budget. If you have exceeded your targets, you need to set new ones. If you find that you’re not hitting the targets, you need to assess if they are realistic and change them accordingly.

Your budget needs to be reviewed each and every month - and changes made when necessary.

3) Your budget is worth nothing if it isn’t compared to actual figures

A budget isn’t something that gets done and never looked at again. You can never hope to get the maximum benefit from your budget if you never compare it against what actually happened. This will help you identify inefficiencies and shortfalls BEFORE it is too late and plan a solution

4) A budget is a limit, not a target

Just because you are ALLOWED to spend a certain amount on entertainment, does not mean you HAVE to spend that amount.

You should always be on the lookout for ways to reduce unnecessary spending in your budget so that money can be reprioritised.

5) Never budget to Zero

Surprises - both good and bad - happen. If you have planned to spend every Rand you make, there will be no way that you can handle the inevitable curveball when it comes. You need to make sure there is something in reserve for when things do not go according to plan

6) Budget for a profit

While this may seem similar to the previous point, the reasoning behind it is slightly different.

Nobody starts a business to not make any money. Profit is our primary goal and motivator - and if our budget is supposed to represent the goal and plan for the business then we need to be budgeting for a profit.

Nobody is going to be motivated to work towards the goal of making a loss - so make sure you are planning for something you want to work towards.

7) Budget to pay yourself a salary

Your business won’t survive if you don’t survive - and if you are struggling to make ends meet then you won’t be able to give your business your best effort.

Make sure you have worked out your own personal budget (the points above apply equally to a personal budget and a business budget) and include a reasonable salary for yourself in your business budget.

After all, a salary for you is something your business HAS to be able to generate - otherwise it is not a viable business at all.