How to Create a Business Budget Plan That Never Fails - Small Business Trends

How to Create a Business Budget Plan That Never Fails - Small Business Trends

How to Create a Business Budget Plan That Never Fails - Small Business Trends

Posted: 13 Jun 2019 04:30 AM PDT

In this age of information overload and uncertainties, even the slightest carelessness may lead you to go over budget. This makes it crucial to create a budget plan that can protect you from such setbacks and unexpected developments. Surprisingly, 61% of small businesses didn't even have a budget in 2018.

We generally make a business budget through the following steps:

  • Estimate revenue.
  • Estimate fixed and variable costs.
  • Keep a general contingency fund to pay for unplanned expenses.
  • Create a profit and loss statement.
  • Outline your budget.

But all of this cannot guarantee a foolproof budget. You need to think beyond traditional budget planning considerations. If you want to create a budget that never fails, you can't constrain yourself to these traditional considerations.

This will involve a lot of research, for which you need to use advanced tools and strategies, consult with experts and department heads, and collect relevant data.

How to Create a Business Budget

Let's take a look at a few ways you can create a business budget that is least likely to fail.

Perform Micro-Level Cost Research

Lean organizations have a greater likelihood of succeeding as a business. So, adopt a minimalist approach and research cost at a micro-level. Don't underestimate the cost involved in some of the ventures such as marketing.

A cost-benefit analysis (CBA) will always help you make quick decisions. However, a CBA doesn't work in more complex situations.

For some projects, cash flow comes in a recurring fashion over different periods of time and with varying returns. You can evaluate the cost of these projects using a Net Present Value (NPV) and Internal Rate of Return (IRR).

Have Realistic Financial Projections

To succeed as a startup, forecasting revenue and growth is extremely important. You can use advanced tools or hire experts for this. Even a slight mistake in forecasting cash flows and profits can spell disaster for your startup.

Estimate Your Expenses First

At the startup stage, it's easier to calculate your expenses rather than revenue. Estimate the most common expenses first such as fixed costs and variable costs.

However, you should remember the golden rule here.

Advertising and marketing costs are likely to shoot up, so you should always consider them to be twice your estimate. Also don't underestimate legal, insurance, and licensing fees.

You can then keep track of your expenses using an app like FreshBooks or Expensify. An app will help you understand the accuracy of your projections and use those insights to make even more accurate estimates.

Business Budget Plan
Image Source: FreshBooks


Forecast Your Revenue

Have two sets of revenue projections – conservative and aggressive. A conservative projection is the normal realistic estimate, whereas an aggressive projection is a more optimistic forecast. Aggressive revenue projections can act as a big motivational factor for your entire team including investors.

Perform Reality Checks for Key Ratios

Working with an aggressive view sounds good and brings a much needed optimism. However, to pay your fixed overhead costs, you need to perform a series of reality checks for key ratios.

Direct Cost Margin = (Revenue – Direct Costs) / Revenue

Estimate Your Gross Profit Margin

Gross Margin = (Revenue – Cost of Goods Sold) / Revenue

As your revenue grows, your operating profit margin should move upward. Don't assume that the break-even point will come early or that you don't need any financing to reach that point. This is the actual indicator that shows you are doing fine as a business. You may reduce costs and move up the profit curve.

Use a 12-Month Cash Flow Projection

A cash flow projection gives you a clear pattern of how and when money is coming into your business. Projecting cash flow over a 12-month period will help you get an idea about your expenditure on a month-to-month basis. This will help you control your expenses and schedule payments, especially for a seasonal business.

Adjust for Uncertainties

Your cash flow projections will remain incomplete if you don't have a plan to deal with "predictable uncertainties" such as payment defaults, late payments, and seasonal fluctuations.

You'll also need to consider economic and industry trends to forecast your cash flow and develop a budget.

Defaulters, Unreliable Payers, and Late Payers

Some customers are habitual late payers and this affects your cash flow. The best way to deal with such people is to chuck them out.

Occasional late payments shouldn't be allowed for more than three times even if they are big clients. Introduce late payment charges and penalties to discourage late payments and prevent bad debt from occurring.

Seasonal Fluctuations

If you want to create a budget that never fails, make adjustments to seasonal fluctuations. There are peak seasons and there are lean seasons, and you can't continue to spend in the same fashion throughout the year.

Plan your spend based on your seasonal needs. For instance, you may need to hire temporary staff during peak season. This will help you save money during lean seasons because you wouldn't be spending on unnecessary workforce.

You can use tools like PurchaseControl to create more accurate budgets that take seasonal fluctuations into consideration. This tool can assign annual and monthly budgets as well as project-based and multi-year budgets. These are restrictive budgets to ensure that you can't overspend without approval from the right person.

Economic and Industry Trends

You can't make a sound budget if you overlook economic and industry trends. If a particular industry is facing a slump in demand, it's wiser to cut costs and minimize production. Keep an eye on the events and forecasts by reliable industry experts.

Human Error

Sometimes, your business might have to deal with expensive mistakes, which would come under an unexpected expense. For instance, you could accidentally pay twice for the same order because you lost some vital paperwork.

Minimizing this type of human error can significantly help you reduce unnecessary and unexpected spending.Automate your workflows and maintain a complete audit trail of your orders for this.

Hire Consultants for Guidance

Hasty and short-term cost-cutting activities won't work in the long run. Set your objectives, seek the advice of experts, and implement workable strategies to cut costs in the long run. Hiring consultants is very important for targeted cost reduction.

Spending on technology and other aspects of your business needs careful planning. For instance, you might not need to invest in an expensive tool just to use it for one project. With the help of a consultant, you might discover alternatives and options that are cost-effective and work quite well.

You might even be able to use free or inexpensive mobile apps in place of an entire software suite.

Get Insights from Managers and Project Heads

Your managers and project heads have first-hand experience of your business operations. They might be able to help you identify areas in which you are overspending. They might even have some ideas and suggestions to improve productivity.

Don't hesitate to outsource certain processes if that's cost-effective for your business. Figure out one-off and necessary expenditure and incentivize performance.

Have a Contingency Plan

Though a traditional budget planning consideration, having a contingency plan always helps. Setbacks and calamities are quite normal these days. Have a plan for financial underperformance so you can minimize the loss in critical areas.

Review Your Budget Regularly

Regular budget reviews and a proactive approach always help. Don't refer to your budget only in the event of a crisis or setback. If your financials are deviating from what you had planned initially, review your budget accordingly. And repeat this process on a regular basis.

Final Thoughts When You Create a Business Budget

According to Grant Cardone, a self-made multimillionaire, and entrepreneur, budgets don't work. What actually works is cutting costs, finding new sources and opportunities for generating income, and having a plan to face uncertainties and surprises. However, if you create a budget plan using the tips above, you are more likely to succeed in your business venture.


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Variable Rate Loans Become More Attractive For Small Businesses As Fed Mulls Rate Cut - Forbes

Posted: 13 Jun 2019 10:37 AM PDT

Big bank approvals of small business loans are as high as they have ever been (at a record high of 27.5%) in the 21st century's post-recession era, according to the latest Biz2Credit Small Business Lending Index™ (May 2019 figures) released this week. Further, almost half (49.9%) of small business loan applications at small banks are being granted. Many of these loans are SBA Loans.

Dollar bills 2019


Whether you are a small business owner applying for traditional bank term loans or for an SBA loan, in most cases the funding will be a variable rate loan. What bodes well at the moment is that Federal Reserve Chair Jerome Powell recently signaled that the central bank is looking at recent economic developments closely and may "act as appropriate" to continue the current expansion.

Experts are predicting that the Federal Funds rate could drop by three-quarters of a point in the next 12 months and fall to as low as 1.75% from the current target range of 2.25 to 2.5%.

In fact, according to a new Wall Street Journal survey, nearly 40% of the 46 economists polled anticipate that the Fed will act in July, while roughly 30% expect a rate cut in September. This news comes even though the overall economy really still is quite robust. For instance, the NFIB Small Business Optimism Index increased in April, the last month reported by the NFIB, to a historically strong level. Profits are still trending upwards, and expectations for sales, business conditions, and credit conditions all improved, according to the NFIB Small Business Optimism Index.

Business owners who qualify for traditional term loans should be able to secure funding at very attractive rates from banks. Entrepreneurs who qualify for SBA-backed loans – usually from smaller banks – will likely secure funding at slightly higher rates than term loans but at longer payoff periods. If you have good credit scores, good lending times may get even better.

Beth Goldberg, SBA New York District Director, said that SBA has guaranteed nearly $600 million in small business loans so far in FY 2019 in the down-state New York area.

"Many small business owners are unaware that they can finance the purchase of their own commercial condo or co-op for as little as 10 percent down with SBA's 504 program. In a robust economy like what we're seeing today, this is a perfect time for entrepreneurs to revisit their business plans and think about if an equity position in their own space is an option going forward."

Non-bank institutional lenders, a growing force in the small business lending marketplace, offer similar interest rates to banks and approved 65.5% of the funding deals they were offered in May.

Two categories of lenders are still somewhat stagnant, according to Biz2Credit's research. Loan approval rates among alternative lenders dropped one-tenth of a percent to 57.1% in May, down a notch from 57.2% in April. Because the banks are lending aggressively and can offer better rates and terms, alternative lenders have declined slowly but steadily this year. Additionally, banks tend to receive applications from higher quality borrowers, and they offer lower interest rates because default rates are so low at the moment.

Credit unions again stayed at a record low 40.1% of loan applications in May, according to the Biz2Credit Index. Credit unions are looking for ways to expand, including partnering with the SBA on small business loans.

According to a recent Federal Reserve report, credit unions are usually not considered the first option for small businesses in need of capital or other financial services. In fact, the National Credit Union Administration (NCUA) and the SBA recently signed a deal aimed at increasing SBA lending by credit unions. The two organizations plan webinars and other events in hopes of expanding credit unions' role in small business lending.

Partnering with the SBA is a good step for credit unions. However, they still are lagging in digitization, which hurts them and because Millennials are less willing these days to walk into a credit union and fill out a membership applications; they much prefer to do things on their smart phones.

Furthermore, credit unions are still handcuffed by the Member Business Lending cap, which limits their loan approvals to 12.25% of their assets. Until this changes – if it ever changes – credit unions will not be able to make big gains in small business lending.

The bottom line is that companies in search of capital have many attractive options right now. If they are ready for startup or expansion funding, now is as good a time as ever.

If You Choose To Start A Business, Make Sure It's Right For You - Entrepreneur

Posted: 12 Jun 2019 05:50 PM PDT

Starting a business is tough. Most startups fail, and it's because the founder faced challenges they couldn't overcome. The right business can be incredibly rewarding though; you just need to know what you're getting into.

6 min read

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur South Africa, an international franchise of Entrepreneur Media.

In the post-2000 era, there have never been as many opportunities for budding entrepreneurs to take the leap and to go it alone, using their energy and steely determination to create their own future careers and income.

I have great admiration for people who have taken on this challenge, made it through all the hurdles and then still have managed to create their own successful business ventures.

We live in challenging times and my belief is that the more business opportunities that can be created by small business owners, the more unemployed people will stand a chance of finding work and creating a source of regular income for themselves and their families.

Related: Why Fear Kills a Business Faster Than Financial Failure

Peter Drucker said, "Wherever you see a successful business, someone made a courageous decision."

I believe this, but we also shouldn't go into business blind.

Be honest when you ask yourself, do I really want this?

Ask yourself why you would want to throw away your existing career. What are your reasons for wanting your own business (no, really!) and are they good enough for you to walk away from your job, assuming that you are currently employed?

It's time to dig deep

Are you easily stressed, or have you had stress issues in the past? Are the reasons for wanting to have your own business because someone you know has a successful business, which looks appealing to you? Maybe you come from a family that has a history of having their own businesses.

Whatever the reason, write it down and think about whether it will make you happier to go this route, rather than remaining in your current career. What is certain about new businesses is that many of them fail, due to a wide variety of reasons.

It cannot be stressed enough that your reasons for wanting to go into your business need to be based on a passion and belief in yourself and your ability to do everything in your power to make it work.

Many first-time business owners just didn't realise what they were in for, before embarking on their journey and what catastrophic consequences were to follow when everything fell apart later on.

Get a second opinion

Are you young enough to bounce back if it all goes wrong, or do you have dependents who rely heavily on your income for support?

Whatever your circumstances, be sure to discuss your plans with family, friends and trusted colleagues, and also create a basic business plan early on to help you clarify what you intend doing.

You may know someone whom you admire as an entrepreneur, so arrange to meet with that person to ask about the ups and downs of having your own business.

Try to choose someone you trust to be straight with you. Discuss your idea with people who are successfully running their own businesses, or even much older business people who will have years of experience that can be used to assist you in making your decision about whether to proceed, or not.

Far too often, people start businesses after receiving payouts given to them by companies, like retrenchments or early- retirement packages. They feel that they must do something with their newly-acquired funds, especially if replacement work is not an easy option.

The problem with this is that it really shouldn't be their primary reason for wanting to pour their hard-earned savings into something that can so easily be a high-risk venture.

Related: Watch List: 50 Top SA Small Businesses To Watch

The lesson here is that there must be a solid and credible reason for wanting to start your own business. If not, taking the slow road and having a secure income may just be your better option.

First, the harsh realities of starting a Small Business (the down side)

Firstly, you may lose everything that you have worked for so far in your life, if your new venture goes unexpectedly wrong.

Your health may suffer and your family life and relationships may be negatively affected, too.

These are some of the worst-case scenarios, but a lesser downside may just be a delayed and frustrating startup, filled with lots of financial stress, punishing self-doubt and human-resource stress.

Know what you're getting into

The unofficial figures for businesses that don't make it in the first few years generally say that nine out of ten don't get to year three.

That said, it's people like you who will continue to push past the boundaries and improve these figures, and business success is good for the economy, employment and the entrepreneur.

To achieve something worthwhile, you will have to step outside of your comfort zone and that is exactly what starting a business does to you.

Most failed businesses are due to fundamental mistakes made by prospective entrepreneurs not doing their homework before starting the venture or, even worse, not detailing a business plan well in advance of the startup, to ascertain the pitfalls versus rewards that need to be considered before investing their hard-earned cash into their business idea, or borrowing money from somewhere.

Common problems why businesses fail in the first two years

  • Improper financing of the business start-up, including accessing finance and/or not determining the correct finance needed. Add cash-flow to this problem.
  • A lack of core skills to drive the business, i.e. lack of management skills, experience in supervision, fluid
  • cash management, customer skills and technical skills, etc.
  • Poor stock management and stock losses.
  • Not finding customers for your products or services.
  • Not keeping expenses down to a minimum, i.e. going for flashy cars, expense accounts, large premises,
  • etc., especially in the early stages.

Pulling it all together

Someone once said, "Don't put if off because it's difficult; do it because it's difficult." It is this kind of positive attitude that will be needed, once you decide to start your own business.

Yes, the downfall could be huge, but so are the rewards, if you succeed in making it work.

This is an edited excerpt of Ian Minto's book, Lessons From An African Entrepreneur, available in all good bookstores.

Related: How To Keep Big Ideas From Being Big Failures


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