Budgeting and Forecasting

Budgeting and forecasting do not come naturally to most people. Both tasks appear as intimidating exercises, reserved for financially savvy individuals or accountants. And when you’re excited about starting your business, it may even be tempting to skim over this step – but don’t do it! Budgeting and forecasting are a particularly necessary step in the “starting a business” journey. Because starting a business can be an expensive exercise, it is important to estimate what it will cost and how much it could make. While these are estimations, they’re really useful for planning and give entrepreneurs the right foundation for business strategy.

Budgeting defined:

Budgets are planning tools that account for the inputs and outputs of your business over a given period. They record what you anticipate receiving (income – think revenue, or loans) and spending (expenses – like inventory, salaries or advertising) in any given month and allow you to understand your cashflow of the business. Budgets are incredibly useful and can tell you what sales you’ll need to cover your costs, how much startup capital you require or how much is available to grow the business through marketing, reinvestment or even hire new employees (amongst others).

There is a difference between a budget and a forecast though – where a budget is a plan, and a forecast is an estimate of future performance based on past data. When starting a business, the two will look similar, but as the business grows and the data/assumptions change, the forecast will change to become more realistic.

How to budget:

A budget consists of 4 primary sections; being income & expenses, assets & liabilities. These items typically make up what accountants refer to as a Profit/Loss Statement, and Balance Sheet respectively. These statements show whether you’re making money and it is highly recommended that you consult and accountant or business mentor to understand whether your estimations are correct.

• Projected Income: Predicted Sales x Price. Note that whilst forecasting your sales is tough and cannot be 100% correct from day one, it’s incredibly useful. There are several methods for doing this, including estimating the size of your target market (and how many you will likely reach), asking a similar business or market expert, setting a minimum “break even” target (what is the minimum you need to sell to cover costs) or market research (understand the size of demand for your product). It’s recommended to combine as many methods as necessary to arrive at a realistic number.
• Projected Expenses: The Cost to setup business (machinery and ongoing overheads like rent) + Cost to deliver product (aka Cost of Sales – supplies, manufacture, distribution etc).

Your projected income, minus your projected expenses, will indicate whether the business will be cashflow positive. If it isn’t positive, try and estimate when it is likely to turn.

• Assets: What the business owns (property, machinery, cash or money you’re owed). Note that asset values change over time, so try and account for this.
• Liabilities: What the business owes (Credit accounts, unpaid bills or loans you’re responsible for).

Because it’s common that new businesses run out of money, it’s also useful to conduct a cashflow forecast, which looks at how much money you may have in the bank at any future time based on future income/expenses. This allows you to make strategic decisions and budget more effectively.

When drafting your budget, it pays to be accurate. Don’t forget to cater for easily-overlooked items, like transport (e.g. staff, or courier), insurance, interest on loans (loan costs grow over time), wastage of supplies (broken packaging), third-party suppliers (the need to outsource certain work), taxes (which effects your net profit), depreciation (i.e. the decrease in the value of your assets like machinery or vehicle).

Smart Budgeting Practices:

• Involve your employees and partners. Anyone with an interest in the success of the company, or experience in the industry, will add value in estimating the costs of the business. Use what you have around you.
• Accurately estimate your salary. You may be tempted to save every cost when starting out, but you need to cater for your own “living” requirements.
• Overestimate and research expenses: Always be conservative. The last thing you want is an unexpected cost popping up.
• Time has a value, too. Ensure that your account for how long it takes to deliver your offering, and how long it could take to increase sales. Have a fallback if things don’t go to plan.

Similar to managing your personal finances, it is recommended that you “redo” your budget regularly to ensure that you account for updated forecasts, and the actual amounts that you spend throughout a period. Both exercises are also very important when looking for the funding to start or grow a business, so take the time to plan and resource yourself. In the words of Benjamin Franklin – the founding father of the United States – “If you fail to plan, you are planning to fail”.

Still not sure where to start? Thankfully great organizations, like Microsoft, offer free downloadable budgeting templates to help you on your way. Visit https://templates.office.com/en-gb/business-monthly-budget-tm23032109 for more information.

‍