How to develop a business budget in 12 steps?

June 27, 2021by CEO

Bad costing, error in pricing, lack of liquidity, according to the article  “ Why Entrepreneurs Fail “ appeared in the Forbes magazine, the financial forecast problems are responsible for nearly a third of corporate bankruptcies.

The expenses necessary to start a business are extremely numerous, the risks of errors are significant and the consequences can be disastrous. Indeed, an ill-established corporate budget is one of the top  reasons for start-up failure .

Why establish a Business Budget?

Beyond the concept of the company, it is important to look at the financial data of the project before launching it.

If a bad budget can be fatal to the survival of a start-up, a well-defined financial plan will most likely lead the company on the road to stable and sustainable growth.

The more accurately and reliably the business owner can predict his costs and cash flow, the nearer the road to success will be.

How to make a provisional budget?

  1. Know your costs

The first step is to calculate as accurately as possible the costs of setting up your business and its day-to-day operations. You must plan all your expenses to establish the basis of your estimated budget .

Separate fixed charges and variable charges:

– Fixed charges

Remain the same regardless of your level of activity. They are also called structural expenses, and must be paid no matter what happens: rents, wages and salaries, internet subscription, software payable monthly, insurance, repayment of a loan …

– Variable expenses

depend on your order book: raw materials, packaging, transport, subcontracting, commissions from a sales representative ….

  1. Estimate the profitability of your project

Based on your projected turnover and your estimate of fixed and variable costs, you can calculate your margin on variable costs (= CA – variable expenses).

Then calculate your Variable Cost Margin Rate (CVMA), which is your margin to your turnover:

TMCV = Variable Cost Margin / Turnover.

This is essential because it allows you to anticipate when you will reach the breakeven point of your activity,  the overall sales volume that you must achieve to cover all of your fixed costs and variables:

Profitability Threshold = Fixed Costs / Variable Cost Margin Rate.

  1. Calculate the gross margin

The gross margin (or commercial margin) is a key element in budgeting . Its calculation is based on the selling price of the product / service to which the cost price is subtracted.

Gross Margin = Turnover / Activity Costs.

Gross Margin gives you the difference between your turnover and your cost. This allows you to work your cash inflows and outflows, and ensure your longevity by adjusting the selling price of your goods or services to your operating expenses.

And most importantly, it is an important indicator of the performance of your business : it allows you to understand if the activity of your company is profitable:

  • If your gross margin rate increases over time, it means that your business strategy is working well, or that you have an ideal management of your expenses.
  • On the other hand, if your gross margin rate goes down, this may be a sign that your business model needs to be reviewed.
  1. Establish a financial projection at 12 months

To achieve your projected budget , you need to estimate the cash flow for the next 12 months. It involves thinking:

  • under the terms of the payments to be negotiated with your suppliers,
  • the payment terms of your customers and the payment methods you want to use,
  • at the rotation frequency of your stocks.
  1. Adjust your forecasts to late payments

Unfortunately, every business has to deal with unreliable payers.

Getting paid on time is one of the entrepreneur’s challenges .

Adjust your forecast budget by adding your cash flow estimates by recording bad debts, late payments and other setbacks that could affect your business income and cash flow.

  1. Take into account seasonal variations

Many businesses experience revenue and profit fluctuations from month to month.

You need to take into account seasonal variations in demand in order to adjust your budget forecasts :

  • Identify seasonal demand trends in your market,
  • Manage your resources according to these trends: when possible, set aside enough to cover off-peak periods,
  • Be rigorous in your cash management,
  • Pay close attention to managing your inventory: be sure to minimize your inventory before slowing down.
  1. Consider market trends

Is your sector growing, static or regressing?

Use reliable economic data from real experts – ideally from your industry – to calculate your company’s growth potential over time, based on trends

To  create a successful business , you must explore current market trends, but also imagine market direction in the coming years.

  1. Negotiate costs with your suppliers

How much will it cost your business to buy or rent the items and services it needs to get going and keep it going?

Establish quotes and quotations now with your potential suppliers to get a firm idea of the total amount your company will have to spend.

  1. Discuss your projected budget with your collaborators

Project all your expenses, operational or exceptional, with your collaborators, associates or managers, so as to include them or not in the corporate budget .

  1. Prioritize your investments

Once all the calculations are done, it’s time to look at the different investments to be made.

This step is also done in cooperation with your employees. Together, it’s about defining the different investment positions, their duration and their amount.

  1. Prepare a plan B

What happens if your business does not work as well as you expected?

Prepare detailed and operational emergency scenarios that you can implement if your company fails to achieve the goals you have set for yourself.

  1. Review and analyze your budget forecasts

Over time, the needs of your business will grow along with its profits.

To use your budget optimally, make a monthly comparison of your forecasts and sales. By subtracting the amount of your actual transactions from a target set over a given period, you get your difference on Sales and Costs.

Regularly compare your actual performance with that originally planned in your forecasts to be responsive, control your costs and adapt your strategy as you go. Adjust your expenses to maximize the growth potential of your business and capitalize on new opportunities.

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