September 10, 2014 10.27 am This story is over 109 months old

The importance of budgeting for SMEs

Budget plan: Richard Hallsworth explains how SMEs can put together a strong budget plan to aid sustainability.

Running a business isn’t an easy task, so planning in advance is not just recommended; it’s a requirement for success. Alongside a strong business plan, an accurate and thought-out budget can be one of the most powerful tools a business has at its disposal when looking towards the future.

Not only can a well-made budget help you make important decisions, but it can also provide useful insight about whether a business is moving towards achieving its goals and objectives, in addition to being a useful way of monitoring performance during the year.

Some of the other key functions a budget can assist with include:
Limiting expenditures
Creating a financial roadmap
Securing loans
Bringing on new partners
Attracting investors

Despite the important role a budget can potentially play in maintaining a business’s long-term health, many SMEs still fail to create and fully utilise one.

Some of the reasons business owners typically give for not having or using a formal budget include: “I don’t know how to make one,” “I don’t think it is a good use of my time,” “It seems too difficult,” “My business isn’t big enough to warrant creating a budget,” and “There’s no need to make one – all the information is in my head.”

No matter what the excuse for not having one is, it’s still an imperative part of successful business planning – but there’s still time to create a budget and make the most of it moving forward. Yes, developing one takes a bit of time, but it’s important to remember that the benefits are priceless.

If you are struggling to make a start on a budget, but want to support the growth and development of your company, here are some tips to help get you on the path to stronger financial foresight:

Know Where to Start
The best way to start putting a budget together is to look at your accounts from over the past year and write down your overhead, or operating, expenses. These don’t change very often and are usually quite easy to calculate.

The next starting step is to look at your direct costs and consider what gross profit and gross profit margin you think you will make on each of your product lines. This will give you an idea of what you’ll be earning compared to what you’re spending.

Don’t Overcomplicate It
It’s easy to make a budget overly complex and convoluted, but do your best not to. A budget can be as simple as writing some expectations of where you would like to be financially next to last year’s figures on your accounts.

A budget can even be prepared by utilising easy-to-use software that ties profits, working capital and cash together, along with overheads.

Put Together a Sales Forecast
An estimate of what a business’s sales will be in the future, a sales forecast is one of the most important parts of not just your budget, but also your overall business plan.

Without one, it’s extremely difficult to successfully manage your company’s stock and cash flow, let alone plan for future growth. To create a successful forecast, there are many aspects to consider, but the most important thing to remember is that these numbers shouldn’t be ‘finger-in-the-wind figures’ but educated estimates based on previous trends you’ve noticed from looking at past sales data.

Seek Assistance
If you are struggling to develop a professional and hard-working budget, call an expert. Financial advisors are an added expense on your budget but can save you time and add their experience to the preparation of your budget. There are also free ways of increasing your business management and financial knowledge and getting assistance – including Business Growth & Finance (BGF) Lincolnshire.

Created to help spur growth and innovation among county SMEs, the county council-led programme offers bespoke strategic management and financial support, including one-to-one consultations and informational seminars.

Following the project’s recent series of successful financial workshops, there are now three more highly informative financial seminars available for businesses to attend over the coming weeks, which will give useful insight on budgeting and finances, in general. The topics we’ll be discussing include Good Financial Systems on 16th September, Financing Business Growth on September 18, and Choosing a Bookkeeping or Financial Management System on September 29.

A working budget is a crucial instrument in ensuring the success of your business, and no company should be without one. As Benjamin Franklin said: “By failing to prepare, you are preparing to fail.”

To book a free place at any of September’s workshops, please contact Rebecca Betts on 0845 27 66 555 or email [email protected]; or if you’d like to know more about BGF Lincolnshire, get in touch by emailing [email protected].

Richard Hallsworth is Corporate Finance Partner with Nicholsons Chartered Accountants & Business Advisers, one of the firms tasked with providing strategic business and financial planning support for BGF Lincolnshire. With over 15 years working as an accountant and financial adviser, Richard has worked with a wide range of clients, from independent traders and owner-managed family businesses to large groups of companies, social enterprises and charities across a range of industries and sectors.