A budget is one of the financial management tools you have to succeed in business. What’s great is that there is a sequence to help you have all your bases covered.
It is important to estimate how your business will perform in future. Just because some predictions are hard to make, like the all-important revenue, does not mean you should have an excuse not to prepare a budget.
You will be able to plan, as you’re obviously aware. Also, it gives you greater control of your business. When you compare between your budget and actual business performance, you’ll be able to know which areas to cut costs and which ones to spend more money on.
There are many ways to draw up budgets and different types of them. It’s all at your discretion depending on how specific you need to be. That said, here’s a simple sequence you can follow:
Revenue is the actual start of a business. So, it makes sense that this is the first thing you will plan for and make effort to control. The sales budget is simple to make, difficult to actualize. All you have to do is estimate the quantity you will sell at the price you arrived at as the entrepreneur. This will give you gross sales. If you’re a nice person and can’t resist giving discounts, account for that as well to get your estimated net sales.
Now that you will want to know how much money you will need to spend to make even more money. Operating expenses for the typical small business in Kenya is usually high. You have fixed costs to reduce whenever you get the chance and variable costs that test your growth management skills. It’s not always about reducing costs though, you can spend more money on an aspect like marketing to boost your revenue.
Which word excites you more? Cash or Money?
Anyway, the reason you must prepare a cash budget despite 1 and 2 telling you whether you’re in the profit or in the red is because profit doesn’t necessarily mean cash. Remember accrual accounting? You can make a sale, record it, but wait weeks on end for payment. Conversely, a cash budget is all about whether you literally got the money or paid out some – no stories, handshakes, etc. It enables you foresee working capital issues.
At this point, you anticipate to have both profit and a positive cash flow reading. It’s only natural that you plan for how all these potential monies will be used. You also want to have an overview of your current assets. But things don’t usually go as smooth. You will likely need to raise money, one time or another over the course of your financial year. This budget helps you plan for that.
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