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Category: ENTREPRENEURSHIP, The Entrepreneur

The importance of budgeting
Written by Tendai Tambudze
9 February 2013

A budget is a way of estimating expenses and revenues. It can help to determine whether a new business will be viable and provide running businesses with a way of realistically setting financial goals and plans for the business. The objective of the budget is to make sure that there is enough money run and grow the business which is essentially a financial roadmap for the business operations.

The first step to creating a budget is to understand all the expenses the business is going to incur. For a new business, this is particularly critical because missing something at this stage can have dire consequences.

Quantifying the business expenses

Make a list of all the direct and indirect costs associated with the business and quantify them. A direct cost can be completely attributed to the production of specific goods or services. Direct costs refer to materials, labour and expenses related to the production of a product.

An indirect cost is a part of the cost of doing business, but is not specifically assigned to producing the product. This can include things such as rent, administration, insurance and maintenance. When working on these costs it is important to limit the expenditure on certain operations which are not essential.

Remember to plan for unforeseen emergencies or complications by having a contingency. Anything could happen from equipment failure to low sales or even a surge in sales.

How much revenue will the business make?

For a new business, an estimation of the total expected revenue can be based on market research and the expected level of business activity. Target realistic sales forecast without over-estimating. A new business will struggle to break into the market and initial targets should not be too high. Pricing the product or service also plays an important role. Entrepreneur.com offers a few guidelines on different ways to price accurately and effectively. 

Control the budget

Once the budget is set, it should be continually evaluated and used to make financial decisions. Businesses that pay attention to financial details are far likelier to fail than those that ignore them. All business costs should be carefully monitored and measure and any variance from the budget noted with corrective action taken where necessary.

Budgets will also help you make decisions about whether prices can be cut for a promotion. The best way to cut prices is to lower costs. The business should constantly be looking for ways to lower its direct costs and always get the best deal from suppliers.

Some of the commonly forgotten items on a budget include the following:

  • Staff benefits
  • Taxes
  • Transportation costs
  • Costs of maintaining technology.
  • Ongoing maintenance
  • Bank charges and money handling costs
  • Raises and promotions
  • Interest on loans

To help make sure you include everything there are several  free templates on Google Docs, Microsoft.com, Business Week and  South Africa SME Toolkit to name a few.

There are also many budgeting programs and software available, however these are not always necessary. They can become necessary for more established and complicated operations. It is more important for you as an entrepreneur to understand your financial model from first principles and know how to adapt it, that to rely on complicated software programmes.

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