Six Steps to Success in Budgeting

Six Steps to Success in Budgeting

By Mike McLoughlin,
Youth With A Mission, Marketplace Mission
Visit the Scruples Small Business Forum at www.scruples.net for more information.

What is a Budget? Why have a Budget? Where do you start?

A Budget is a method of estimating your income and your expenses over a period of time for the purpose of controlling your financial affairs.

1. Gather your Information:

What are you planning that will cost you money?

What are the actual expenses?

When will these expenses occur?

Where will these expenses occur?

How will these expenses occur?

Will the expense require cash or can credit be used? What are the terms of credit & interest?

What can you do to minimize the expenses?

Can you spread the expenses out over a period of time?

What are the other hidden costs in time and labour?

Can you estimate these in monetary terms?

How will you recover your costs?

Have you factored in the effects of inflation?

2. Make the necessary assumptions:

How will you generate revenue?

What assumptions are you making about the number of customers, the amount each will purchase, the price of your product or service, etc.?

What will you receive in cash and what will be sold on credit?

What assumptions have you made in estimating your expenses?

What are you assuming about the present and future state of the economy, about the present and future state of your industry and/or market?

3. Prepare the Budget:

What are your estimated revenues and expenses?

What is the time frame for your budget? Daily, Weekly, Monthly, Annually.

How will your cash flow differ from your budget? Why?

How will you reconcile the two at the end of your financial period?

4. Organize and Implement the Budget:

How are you keeping an accurate measure of what is happening with your finances?

Are you recording all the information that is necessary for you to properly evaluate your actual results versus your budgeted results?

How can you organize the collection of information so that you can see what is happening as it happens?

5. Evaluate the Budget:

How long has it been since you last looked at your budget?

How far out of date is the information that you are reviewing?

Has your information on expense been correct?

Have your assumptions about revenue proved true?

What adjustments do you have to make to your budget to bring it into line with reality?

6. Watch the Cash Flow:

What major cash expenses do you have during your business cycle: monthly, quarterly or annually?

What are your cash reserves and how will you meet your cash expenses?

Do you plan to use your credit line to meet large cash expenses? If so, have you informed your banker when you will be needing credit? Are you sure that your cash income will cover the large cash expense quickly so that you are not paying unnecessary bank interest or service charges?

What happens if you face a cash crunch, what alternative sources of cash are available to you? Many small businesses fail because of a shortage of cash!

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