Tuesday, August 10, 2010

Welcome to the Reality of Business Budgets and Planning

Plan for the worst, not the Best!

If you had a business plan before starting your business, you can avoid problems as early as possible. A business plan helps you to anticipate your capital needs. And even without the guidance of a business plan, you should have a realistic feel of your capital needs even before profits starts to flow-in. And by setting budgets that are realistic and honest is the most basic yet difficult. We need to know exactly how much it will cost to run our business and thus how much money we will need to cover those costs.

A common mistake in business is poor planning and unrealistic expectations in terms of income and expenses. From my experience the three most common errors are:
·         Underestimating costs or expenses. Always anticipate the need for more operating cash and capital, most especially at the start of your business. Never! As in Never say! “Pwede na yan” or  “kaya yan” Always have someone to run to for small business loans such as a friend or a local bank.
·         Do not put in all your savings in the business. Leave a portion for emergencies like a need for more capital.
·         Failing to identify that money will be slower coming in than expected. Apparently, the end result of these errors is serious lack of cash or cash flow problem.
Seriously, after experiencing all of this it is obvious that realistic approach in budgeting is very important. Don’t plan for the best possible scenario, plan for the worst. If everything turns out better than expected, you will end up with more money in the bank. It’s easier to live with that than always thinking of what’s lacking – which is money/capital.

You have to take into consideration some out-of the- ordinary unexpected cost such as:
  • ·         Rents
  • ·         Bank fees
  • ·         Taxes
  • ·         Repairs or maintenance
  • ·         Credit cards

The following are some of the business scenarios that may indicate you need more planning with you capital right away:
  • ·         Your money runs out even though you have not yet started operations yet
  • ·         You are uncertain of all your capital needs to start your business.
  • ·         You have a hard time paying employee’s salaries or suppliers for your first six months in business
  • ·         You take too much risk on used machinery hoping that it keeps on running until there is enough cash to get it fixed later
  • ·         Self-employed mindset, you do not trust other people, so you decided to create your own products manually and did not outsource it which is much cheaper in the production process and saves time.

Now you need to allow for unexpected costs. You should have at least 20% per month on out of the ordinary costs, and generally this more than covers those extra costs. We have to be optimistic to run a business, but there is a fine line between optimism and ignorance. As far as I am concerned, income is not guaranteed until you saw your money in the bank. I’ve also experienced spending the money not yet in the bank only to find out that the project I’ve known did not pursue. Be very careful of making assumptions that cannot be backed up.  Only you can really set your budget for expected income.

Other factors  that might influence your budget and planning is to relate to your location, costs, competition, appeal of the business, staff, and so on. A common practice of good budget planners is to allow for both the worst case and best case scenarios.

In closing, a conservative budget is a trademark of successful businesses and it will certainly make running your business easier. It is important that you need to be a realist when planning. Seek advice from someone who already knows the business then emulate him.

You Need A Budget (YNAB) - Personal Finance Software   Dave Ramsey's Financial Peace University DVD 3-Pack: The Great Misunderstanding, Cash Flow Planning, and Dumping Debt [DVD]   Best Practices in Planning and Performance Management: Radically Rethinking Management for a Volatile World

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