09/ 05/ 2008
by Glenn Townes
As a small business owner, one of the most important things you have to do is prepare a budget annually—financial planning at the bare-bones basics. You must establish an annual budget and deal with it every day. Accurate charting of your actual financial performance against your financial goals is a pivotal part of entrepreneurship.
Unfortunately, budgets are prepared annually and often are not reviewed until it's time to prepare a new one. However, by this time, it might be too late to revamp or strategize the budget to meet your goals. Keep in mind that similar to maintaining a garden successfully or even preparing a special gourmet meal, a sound and appealing budget must be watched and nurtured on a regular basis. Developing and enhancing an annual budget on a consistent basis will ultimately help a business to prosper. For example, a well-planned and carefully executed budget will help an entrepreneur:
- Predict sales
- Control costs
- Reduce spending
- Estimate production costs
- Set specific goals for payroll costs
There are generally three types of budgets a business owner can and should establish.
- A cash flow budget. This type of budget specifically details the amount of cash that is collected—usually monthly, but sometimes weekly. The cash flow budget accurately chronicles specific details of the cash sources and amounts that a business receives and distributes. A well-documented cash flow budget will enable an entrepreneur to build and maintain the cash reserves needed for future growth.
- An operational budget anticipates and precisely (or at least pretty closely) predicts the revenue and expenses for a company for the year. An operational budget is perhaps, the most common type of budget used—sometimes in conjunction with the cash flow budget in conjunction with an operational budget.
- The capital budget places a value on the equipment that is needed in order to grow the business and boost revenues to the next level. Perhaps the importance of the capital budget is to assess how much it will cost to implement new procedures and equipment in order to create a new product or expanded service for the business.
In order to create and analyze a budget effectively, a business owner must clearly define a vision and set goals for the company. Ask yourself where you want your company to be in two, four or six years. How do you want the company to expand—by adding more staff, equipment, products or services? Determine if you want to make the business a part-time endeavor that becomes a full time gig.
Finally, consider these steps when preparing an annual budget:
- Examine the vision of your company
- Review last year's budget
- Add the new numbers to your budget—income and expenses
- Review the budget and determine if it's attainable
- Compare and review your budget on a weekly or biweekly basis
It's okay to have a budget that may prove to be a challenge, but don't be unrealistic and set financial goals that you will unlikely be able to achieve.
