Seven Steps to Expert Financial Management
Your business success relies on sound financial management. The first step towards achieving this is operating a well-managed budget. The budget lets you set income targets, establish spending priorities, and monitor revenue flow.
This knowledge can support better planning, which gives you more control over your business operations. To get started, we’ve identified six steps to creating a business budget that helps you sharpen your competitive edge, and build a more secure financial future.
1. Create an accurate baseline
If you have an existing budget for the last year, update it with the actual income and expenditure. This creates an accurate baseline as a starting point for your next budget. If you don’t have an existing budget, or if your company is just starting up, you’ll need to start from scratch. Analyse your records from the last year to establish how much income you earned, and how much money you spent. If you’re a start-up, you may need to do some market research to get an idea of the costs you need to cover.
2. Know what you need
On a spreadsheet, lay out all anticipated costs, and apply a timescale for when you’ll need to pay them. Technology has made this process much easier. Software packages such as Microsoft Excel and Google Spreadsheets are very easy to use. Other packages and applications can draw information directly from your bank account. We’ve included some details later in this post.
Some expenses are more regular than others. Some will be fixed, while others will be variable or semi-variable. Fixed costs are items that don’t change, regardless of your sales, such as rent and rates. Variable costs depend on your sales. For example, if you’re selling more products, your materials costs will be higher. And semi-variable costs are part-fixed and part-variable, such as telephone bills divided into fixed line rental costs, but with variable call charges.
Remember to include anticipated capital expenditure, too, such as costs for new computer equipment, or office renovations. Depending on your business other line items could include, but are not limited to:
- Loan repayments
- Tax bills
- Salaries and wages
- Postage and packaging
- Travel and transport
- Telecommunications, including landlines, mobile phones, internet connectivity
- Stationery and other consumables
- Cleaning and maintenance
- Books and subscriptions
3. Know what you want
Any journey needs a destination. In the same way, when you’re budgeting, you need to set a goal. This is the gross profit you want to make each year. This number will give you a target to work towards as you start trading in the new financial year.
4. Adjust the numbers
Once you know what profit you want to achieve, adjust your expenditure estimates to ensure you can effectively manage your finances to reach the target. This may mean cutting costs if your expenses are too high. This will help you anticipate when you need to cut back, or when you can afford to invest in capital expenditure.
5. Set your sales targets
Knowing what your expenses are and what profit you want to achieve will guide you in setting income targets. This is where you identify how much you need to earn to cover your costs and achieve your profit target. This will guide operations, and will determine the sales strategy for the year.
6. Talk to your team
It’s important to talk to your team about the budget, giving them an insight into what you want to achieve. It also determines what they should be doing individually and as a group to contribute the business’s success. You may even want to encourage them to get involved in other ways: they may, for example, have good suggestions to help cut costs, or new leads to profitable deals.
7. Respond as you go
As we mentioned earlier, budgeting isn’t an exact science. Circumstances could affect your cashflow as the year progresses. Monitor the budget regularly to ensure the business is on the right track. Monitoring helps you to respond to dips in cashflow, take appropriate action against defaulting customers and make exciting plans for future expansion.
If you’re often out and about, you could consider using a financial management application on your phone or tablet to manage your money wherever you are. Some examples are BSAVI, which gives you a real-time view of the money in all your accounts so you can know what you can spend and save at any given time; Expensify, which takes the hassle out of recording your daily expense receipts; Mint and InDinero, which both integrate with your bank accounts to track your daily transactions; and FreshBooks and QuickBooks, which both offer invoicing, estimating and accounting capabilities.
Some apps are free, or part-free, while others attract a monthly subscription.
It’s also worth noting that some banks – FNB is one example – also offer cashflow and accounting packages with business bank accounts, so it’s worthwhile checking if your bank can help in this way too. These packages help to automate the money management process, drawing data directly from your bank account.
What budgeting techniques do you use in your business? Let us know in the comments below.
Good luck! Here’s to 2015.