Small businesses planning ahead for 2022 and beyond will be setting themselves ambitious targets—perhaps including international expansion. But those ambitions are likely to be thwarted unless the business is built on strong foundations. It is thus vital that you plan your operating budget carefully, review your progress against it regularly, and make changes if circumstances require.
Businesses in different parts of the world—and various sectors of the economy—will naturally face different challenges and opportunities. But the principles of good budgeting are universal: by working through the numbers, you will understand whether your goals are realistic and achievable, and be able to chart a course towards them.
To do that effectively, you will need to think about each of the components of your operating budget in turn. Focus on your:
- Sales budget—this is a list of your forecasted sales, set out both by expected units sold and the value of your sales. In other words, it is a projection of what your business expects to sell and the revenues this will bring in. It makes sense to start your operating budget with your sales budget, because this will inevitably inform spending, such as determining the stock you need to purchase, and your potential production costs. Sales budgets are often very detailed, and they can be split into individual product and service lines, and broken down by geographic region or product type.
- Stock and production budget—once you have an estimate of your sales over your budgeting period, focus on stock and production. This starts with you deciding the levels of inventory (stock) your business should hold, and how and when you will restock, both with raw materials and finished goods.
In turn, this should help you work out what you will need to spend on production in order to maintain stock levels, as well as costs such as wages for employees directly involved in the production process, and the purchase of raw materials. Depending on the size of your business, you may need to do individual stock and production budgets for each department of the company.
- Overhead budget— Overheads are any costs that are not directly related to sales or production. This will include everything from the wages of staff not directly involved in production to energy and utility bills, spending on communications and IT, and property costs such as rents on offices or factories.
- Marketing budget—it makes sense to strip the marketing budget out of your general overheads, since this is a key area of focus as you work to expand your business.
Most companies opt to have a dedicated marketing budget. This will break down into costs such as advertising activity, content creation, software, and other marketing-related items. It could also include the wages of your marketing staff.
Another way to think about your operating budget is to regard it as covering all your running costs—the money you spend day-to-day on the business. That will help you distinguish it from your capital budget; this is the money earmarked in your business for longer-term investment; anything from replacing production equipment to funding a move into a new market.
Setting a realistic budget
One question many small businesses struggle with is how to set realistic budgets each year. In practice, there are several different options. For example, you could opt for an incremental approach, simply increasing your budgets by an amount roughly in line with inflation, which has the advantage of being quick and simple. Alternatively, a zero-based approach means starting from scratch, forcing you to think again about each area of the business.
The middle ground is to take a priority-based approach, where you increase your core budget items incrementally, but think hard about what your business most needs to focus on. This can be a good way to align your budgets to your company’s specific targets. It may also make sense during periods of change and disruption— the COVID-19 crisis, for example—when your business may be in a very different place since the last time it set budgets.
Whichever approach you go for, make cash flow an important part of your budget planning. Even very successful businesses come unstuck because of cash flow problems. Think about whether there is enough cash coming into the business in a timely fashion to support its outgoings. For example, are customers paying you quickly enough to fund the stock purchases you plan?
Scheduling a budgeting period
Finally, you will also need to set a budgeting period, typically around your company’s financial or fiscal year. In both the U.K. and the U.S., companies usually have the option of deciding when their financial year will end, but each country has its own idiosyncrasies. In the U.K., for example, companies often want a financial year that aligns with the official tax year, which runs from April 6 to the following April 5. In the U.S., the Internal Revenue Service says companies can use the calendar year as their tax year, or a fiscal year of their choice.
It makes sense to keep things simple, but businesses that trade seasonally may want to consider this. If there is a particular season when sales peak, having your fiscal or financial year-end at the end of the following quarter may give you a better view of its 12-month trading.
Start 2022 off strong by connecting with RangeMe’s trusted broker partners to further increase visibility with retailers here.