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Financial planning - two simple budgets you need to master (to avoid the headache)

  Some get a headache just thinking about budgets. Others make them too complicated.

I have been a business owner for more than 15 years and have written many books on what entrepreneurs can do to make things a lot easier. I know how to make budgets more fun (I belong to that group who always got a headache when the task was mentioned).

So, join me now and we'll see if we can cure your headache as well.

First - the problem with budgets
A budget allows you to write down a lot of numbers that describes your company's income and expenses. The costs are easy to write down, they are relatively easy to take control over. The hard part is figuring out the revenue because you can write any digits you want there and they probably will not match up anyway. The problem of revenue is that they can play tricks with your ego. It's really easy to write a sales budget that will match your desires, but it won't pay your bills.

Tips# 1: When you make a budget - pretend you're doing it for someone who wants to borrow money from you to start a business. Be tough - it's the only way to succeed with a budget.

Tip # 2: The most important thing in your business is to know exactly what costs you have so you know exactly how much money you need to get each month to keep your business alive and well.

How to make a profit budget
Once your business has been up and running for a while, it's time to sink your teeth into a performance budget. The result budget is a tool for you to be able to set revenue and expenses against each other over a period of time - usually one year.

You register your revenue:
• Sales, interest, etc.

You register your costs:
• Salaries
• Premises
• Social security contributions
• Travel expenses
• Electricity
• Heat
• Repairs
• Telephone
• Computer costs
• Accounting, audit, tax returns
 • Marketing
• Insurance
• Leasing
• Car costs
• Depreciation

The figure you get when you deduct the costs from your income is called profit. After tax and other deductions you know what kind of money you will have left.
Not too hard, is it ...?

To make a cash flow budget without getting a headache
A cash flow forecast will show you how much money you have in your business now and at various points in the future so that you can plan for downturns in the economy long before they happen. A very useful tool, indeed.

As a self-employed business owner you often keep your cash budget in your head. You know when VAT is due and when taxes are going to be paid. You know how much money you can invest in different things because the economy is so far very easy to grasp. As the business grows, it may be necessary to still make a cash budget to keep track of the way your money moves in your business and to make sure that are not left without money when your bills are due to be paid.

A concrete example:
You bill a customer for a job done on March 21st. You offer your customer a 30 day payment term. This means that you will get paid for the job on April 20th and it affects your cash flow budget for April in a positive way. Your retailer billed you for the material used on March 3rd with 30-day payment terms. That means you must pay your bill on April 3rd when there are still 18 days until you get paid from your customer. This will affect your liquidity negatively during the greater part of April because you will be out of money for 18 days until you receive payment from your customer. Do you follow?

What you should do:
• Look through your financial results which display the cost advantages over the twelve months.
• Make a negative forecast for the money to come in during the twelve months.
• Match the expenses you know about against the revenue you know about during the period.
• Evaluate. Are there problems with liquidity? If so, how can you avoid them? Can you increase revenue, use an overdraft, take a temporary loan or allocate costs in some other way?

Once you've done this, you have a moderate amount of control over the liquidity of your business and that will help you sleep much better. When your business gets bigger, so do the demands of a more detailed cash flow budget.

Quite simply – don't make it harder than it needs to be.

About the author

Stefan Ekberg has worked in marketing for small business for 20 years and has written around 30 books on how small business owners can market themselves with limited resources. . In 2012 Stefan was nominated as Entrepreneur of the Year in Stockholm.

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"The 5 minute marketer" - the book
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