Don’t fear a good budget
TOOL: IT‘S A GUIDE, BASED ON YOUR STRATEGY Even if revenue is uncertain, a mini budget can help with allocation of resources to important elements.
One of the most difficult functions entrepreneurs struggle with is budgeting, which is an important, but misunderstood, tool that can greatly help manage a business in terms of planning and controlling expenditure.
Entrepreneurs rarely use this tool because of the uncertainty of funds/revenue. It is all good and well to create a budget but without the money, it might seem like a pointless exercise.
In that case, it is advisable to create short term or mini budgets. Unlike big corporations that have vast financial resources that allow them to create a 12-month budget, small businesses do not have that luxury due to the uncertainty of funds. A possible solution is to create quarterly budgets which would work hand-in-hand with the availability of financial resources.
But one thing to remember is that budgets are not set in stone. Entrepreneurs have this idea that once a budget is created it must be religiously followed. That could not be further from the truth. One of the key traits of a competent entrepreneur is his/her ability to adjust to situations.
A budget is a guiding parameter based on your strategy but as your strategy changes due to unforeseen events or a lack of success, your budget should change accordingly.
Creating an efficient budget that works to the betterment of your business starts with understanding the purpose of budgeting. Budgeting is not merely an exercise of allocating funds to pay bills and operating expenses.
The whole idea around budgeting is to allocate adequate financial resources to specific key areas of the business that create the greatest value. This, therefore, requires you to thoroughly examine your business in order to determine which area of your business creates the greatest value. Upon this knowledge, you should allocate the greatest portion of your budget to that function of the business.
All businesses have expenses, but we must stop looking at them as expenses but rather, as tools to generate revenue. And if we can understand which tools (expenses) contribute the most in generating revenue we would commit adequate financial resources to those tools in order to generate more revenue.
For example, most entrepreneurs bemoan paying salaries by labelling them a great expense to the business. No, salaries are not expenses, employees are great assets that contribute to revenue generation as do other functions of the business such as office rent, utilities, etc.
A budget should reflect the allocation of financial resources based on the value creation contribution of each function of the business. With such a budget you can determine what to prioritise and what to sacrifice when times get hard.
Munya Duvera is chief executive officer at Duvera Elgroup
Salaries are not expense, people are assets