We know the importance of good bookkeeping and accounting practices for Small and Medium Enterprises (SMEs) in India, and how they work as stepping-stones when applying for small business loans. Now, let’s talk about something that can set the ball rolling for any small business—a business budget.
A strategic budget is an essential part of an SME business plan to raise a small business loan. It improves the chances of SME loan approval as it gives lenders a tool to track whether decision-makers stay focused on medium to long-term business objectives. Specifically, it helps lenders and SMEs keep track of:
- Sales needed to cover expenses
- Money that can be reinvested in the business
- Scope for hiring employees sustainably
The following six steps provide an easy guide to a strategic business budget:
- Acquire Tools and Templates
To create a good budgeting plan for a small business, get an SME-focused accounting software or just use the good old excel spreadsheet to get started. There are numerous resources online to help SMEs get started; for example, the sample Business Budget template by the Balance. However, every business model may have unique requirements, and the template, as well as software, may need to be customized for the same.
- Determine Expenses
This is a critical step where every potential expense needs to be accounted for. Unexpected outflows can severely impact a small business’ functions. The primary expense types are:
- Initial/expansion expenses: Costs that lead up to the start or expansion of operations (refer checklist). These could be one-time (such as legal fees to incorporate, purchase of property, equipment, etc.) or repetitive (like hiring contractors, training employees, etc.).
- Operational costs (fixed/variable): Fixed expenses include rent, phone bills and salaries (find common fixed expenses here) that do not vary with the volume of business. Variable expenses are linked to producing or selling the product or services, such as raw materials, warehousing fees, hourly wages, etc.
- Estimate Monthly Revenue
New businesses should estimate revenue for three possible scenarios: best, worst, and most likely. Existing business should consider the recurring/regular income with the current rate of growth, and forecast expected income based on this.
- Incorporate Profit/Loss and Cash Flow
P&L and cash flow statements help track whether the business is generating enough cash from sales revenues or if the business needs working capital credit. Frequent loans may also indicate instability from a lender’s perspective.
- Create Balance Sheet
Balance sheet forecasts indicate what a small business is worth and give a clear idea of what it owns verses what it owes. As part of the budget, the balance sheet assets and liabilities should be included as ‘budgeted’ and ‘actuals’ for each month. Major discrepancies can alert owners as well as lenders to an upcoming shortfall or excess of cash, and allow them to strategize accordingly.
- Review Periodically
The budget should be reviewed frequently to monitor performance (actual) against goals (forecasted) and required corrective action taken accordingly. While large firms draft a budget annually, small businesses should do so at least once every six months, with monthly reviews.