The small and medium enterprises (SMEs) sector is arguably the engine of economic growth. For instance the sector plays a crucial role in generating employment and income as well as provision of goods and services. However, with this kind of challenges that SMEs face, remaining afloat is not an easy task. Therefore, planning in advance is not just recommended, it is a requirement for success.
Whenever it comes to running a business, it’s easy to get bogged down by day-to-day problems and thus forget the bigger picture. However, many successful businesses today invest time to create and manage budgets, prepare and review business/strategic plans and regularly monitor finance and performance. In addition, they take time to monitor their overall employee performance and ensuring they have the skills and capacity to achieve the overall mission of the enterprise.
Structured planning can make all the difference to the growth of your business. It will enable you to strategically concentrate resources on improving profits, reducing costs and increasing returns on investment. In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cash flow and profit.
Converting this into a cohesive process to manage your business development does not have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved.
Alongside a strong business plan, an accurate and thought-out budget can be one of the most powerful tools that a business has at its disposal when looking towards the future. One significant factor about a budget is that it will provide a useful insight on whether a business is moving towards achieving its overall goals and objectives.
However, it is a common occurrence that small businesses, particularly micro-businesses with less than 10 employees, have a habit of shying away from developing an operating budget. Due to their level of operation, majority of these owners feel they have no way of projecting their revenue and therefore have nothing much to budget for. This is a recipe for disaster.
In spite of a “hypothetical” inability to project revenue, we need to appreciate that despite the size of your business, it is still incurring expenses. Therefore, a business owner ought to develop a basis by which they can discern various business trends in their industry and identify viable business opportunities that will enable them make decisions about how best to run their businesses. A budget is one of the critical tools to help achieve this.
In order to build understanding, there are a number of advantages when it comes to preparing comprehensive budgets. First, a budget will help you become a better manager. When properly prepared, budgets are extremely useful in refining your ability to forecast and manage your business. Boards of companies prefer to use budgets so as to hold managers accountable for resources.
As a business owner, you can use a budget to determine whether the key drivers of your business sector are valid. One of the ways to achieve this is to develop annual budgets with a set of different assumptions such as estimated number of new clients within a certain period, product price among others upon which you can reforecast each year updating those assumptions.
Second, budgeting will enable you to raise money. Whenever you approach a financial institution like a bank or when you approach a private investor, one of the main documents you need to provide is a budget. The budget is able to describe how much capital is required for you to either begin or re-stock your business. As you determine the amount, remember you need to have guided parameters that justify your budget. Developing a company culture that tracks results to budgets will help you meet and exceed expectations of your investors.
Third, it will help you avoid running out of money. For continuity of business and operations, it is vital to ensure there is readily accessible liquid money to take care of daily activities within the business. The key here is to establish how much liquid money is essential at any given time. Therefore, as you budget, the focus should be budgeting for expenses and not revenue because they are much easier to forecast. This will help keep track of regular monthly expenses and how to embark on cost-cutting.
Budgets are difficult to plan and maintain at the best of times – unexpected events, cash flow problems, supply chain issues and more can all reap havoc with even the most thoroughly planned business budgets. The other problem with budgets is that many of us set budgets in our business and personal lives at the beginning of the year, and then file them away until the year-end rolls around once more. This is where the problem lies because your business is never static, and your budget shouldn’t be either.
Therefore, the steps that we need to take to ensure we have a reliable working budget include:
Updating your budget monthly
If your budget is going to work for you, plan on revisiting it on a monthly basis with your management team and update it based on your business performance and expenses for the prior month. Take a look at your sales forecast – how’s your pipeline looking? Are there any indicators that you need to make changes to your budget to cover additional inventory or staffing needs? Look at your expenses – are they as projected, or do you need to cut back in certain areas to ensure you stay on track?
Make changes that can have a positive impact
Based on your monthly review, make changes to your budget and then wait to see what impact these have to your income and profits – by month and by year. For example, perhaps you are under-investing in marketing – adjust your budget and see what happens to your said pipeline next month or over a six-month period. In your next review cycle, look to see if you are getting good returns from the money spent on marketing. Then use this information to inform future planning decisions about where best to allocate your costs.
Respond to unexpected changes
Use your budget to help you adjust to the unexpected. Say, for example, an important client cuts their own budget and reduces the amount of business they do with you. Take a look at your budget and how this reduction in revenue affects your cash flow and for how long, meaning how long will it take to find a new client to replace that important revenue source and what will it cost you in terms of marketing or hiring costs to help you uncover new business?
Tie incentives to budget performance
A great way to get everyone on-board with the idea of focusing and interacting regularly with your budget is to tie performance bonuses to it. So, at the beginning of the year when you plan your annual budget, set parameters for performance tied to profit. In addition, consider other categories such as return on investment in marketing, keeping expenses at or lower than plan and so on. In conclusion, to use and take advantage of your budgets, they need to be reviewed and revised frequently.
The writer is the Chief Executive Officer of Gateway Success Consultancy Ltd.
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