Budgeting simply means planning and controlling how your business spends money, explains David Hubbard of Middlewich-based management accounting services provider Jugglers (“the accounts department for companies that don’t have one”).
“Creating a spending plan – or budget – allows you to determine in advance whether you can afford to buy things your business needs or wants. But your budgets must be based on reliable sales forecasts. If you keep on spending more than you can afford, you’ll soon run into cashflow difficulties,” he warns.
Business benefits
If your monthly sales are less than you forecasted, you can adjust your monthly budgets accordingly, Hubbard adds, to prevent further debt. “Some people don’t adjust budgets because they’re reluctant to accept what the numbers are telling them. Most businesses have no trouble spending budgets, but your sales must be able to sustain your spending. And when working out budgets, you must factor in all likely costs throughout your business.”
So, why don’t all small businesses work with budgets? “Some owners just don’t realise the benefits – chiefly helping you to stay in control of your costs and cashflow. There’s also a misconception it costs a lot and takes a lot of time and effort. But budgeting is a good habit to get into right from the start, when money is really tight and you’re trying to build your customer base. Budgeting can also enable you to test the viability of your business idea and work out how much working capital you need.”
Cashflow positive
One business owner who believes in the power of budgeting is Daniel Prendergast of Manchester-based luxury online rug retailer, The Rug Seller. “Budgeting has always helped me to run my business. That goes back to the earliest days, when I needed to allocate budget to various areas to get my business off the ground,” he recalls.
Prendergast says budgeting enables him to limit his costs, control his cash flow and generate profit to help grow his business. “I work my budget around a three-year business plan, which I const antly evaluate, measure and adapt. By forecasting for three years, I can identify the needs of the business and allocate budget accordingly. I can also compare forecasts against actual results each month, so budgets can be adjusted to ensure we stay on track.”
Flexible approach
It is easier to set budgets for fixed costs, such as rates and insurance, Prendergast admits. “It’s trickier with variable costs – some flexibility is required. I adjust budgets when actual results are known. For example, our advertising budget is measured each month. We identify which campaigns have worked well and sometimes allocate more spending.”
So, what key budgeting lessons has Prendergast learned? “You must combine budgeting with planning, forecasting and measurement,” he replies. “I’ve also learned that budgeting is key to managing your costs. Businesses often fail because they didn’t control their costs. Even if you survive, you can easily waste money if you don’t take a planned approach to your spending, which can also limit your growth,” he warns.
Putting the flex in fixed costs
Certain costs regarded as fixed in fact do fluctuate. A prime example of this is energy costs which can change depending on tariff and time of use.
“Energy is an important area where budgeting can help small businesses and smart meters can certainly help,” says Claire Maugham, director of policy and communications at Smart Energy GB, the independent organisation that is working to raise awareness of the benefits of smart meters for domestic consumers and small businesses.
“Being able to see exactly how much gas or electricity your business uses each month enables you to not only make savings where possible, but also create monthly, quarterly and annual energy budgets for the future.
“Predicting future energy costs can better enable business owners to maintain control of their costs and cash flow. If you’re not sure how much you’re spending on energy or how much you can afford to spend on energy – how can you be sure you’re not spending too much?” she asks.
Control issue
Simon Macaulay is the managing director of Rochdale-based Anglo Recycling Technology Ltd, a small business that manufactures felts from recycled fibres. These are used in products ranging from carpet underlay and sound insulation to felt used in the horticulture and automotive sectors.
“I’ve always worked with budgets since taking over running the business. You need to control your spending,” he stresses. “Working with budgets enables you to do that, which is crucial if you’re to keep your cash flow healthy.” As Macaulay explains, spending too much in one area might seem relatively unimportant. But if it happens in a few areas, especially by a significant amount, it can create severe cash flow issues.
“Budgeting forces you to consider your spending last year,” he adds. “You might be able to save money in some areas. Or, looking at your sales forecasts, you might find that you need to reduce your spending in one or more areas. We work with monthly budgets for all main cost areas, because it grants us greater flexibility to reduce our spending if necessary, rather than waiting many months to find out, when it can be too late.”
Basic advice
Macaulay says budgeting enables him to make important decisions in a structured, controlled way. “You might have to reduce your wage bill, marketing spend, energy use or travel costs – whatever. But you can make those decisions before you risk running out of cash. Your costs can spiral out of control if you have no spending limits. Budgeting encourages you to consider your spending, live within your means and stay in control of your finances.”
So, what advice does Macaulay offer to those who don’t budget? “Most small businesses don’t need complex, highly detailed budget spreadsheets. You just need to set budgets for your main cost areas and stick to them. Act quickly to reduce them when necessary. Taking a very basic approach to budgeting is better than having no idea how much you can afford to spend or how you should spend it. Having a very basic budget is better than having no budget at all.”
Content on this page is paid for and produced to a brief agreed with Smart Energy GB, sponsor of the Managing Your Cashflow hub on the Guardian Small Business Network.
