The budget is your company’s road map to financial success. You can’t do without it and you can’t mess it up.
“The most common mistake an entrepreneur makes is assuming that the target profit for a given period is the same as the cash flow,” says Henry Ong, owner of an auditing and consultancy firm offering accounting and payroll services, tax planning, strategic planning, and business coaching to small and medium businesses.
[related|post]Cash is of course money in the form of coins and bills as distinct from money orders or credit. Cash flow is the pattern of income and expenses and its consequences for how much money is available at a given time—or the prediction or assessment of your company’s income and expenditure over a period of time.
Ong, whose company, Business Sense Inc., helps small and medium businesses improve their financial reporting and set up accounting procedures, says most entrepreneurs don’t track their finances monthly, and that omission increases the possibility of failure “because the entrepreneur operates his business without direction. Regular financial reporting provides a basis for budgeting and a monitoring system for a budget plan.”
A good budget plan helps you realize a specific sales target for a certain period and manage your expenses to increase your profit. “The budget will tell you when to reduce cash expenditures—such as hiring fewer employees or buying less expensive supplies—or increase sales by expanding your product line, intensifying your marketing campaign, or lowering your profit expectations to achieve your financial goals,” Ong says.
You must make assumptions when designing your budget plan—such as the accounts receivable to be collected, the inventory to be sold, and the payables to suppliers that you expect to pay. “It’s important that your assumptions are correct and realistic,” Ong says. “An entrepreneur who underestimates his expenses but overestimates his sales forecast is in for big losses.”
Your forecasts for inflation, depreciation, allowances, and seasonality must equally be realistic. “Be conservative and allow for inventory write-offs, bad debts, and unexpected expenses. And if you do your budget monthly for one year, assume some seasonality in sales to see its impact on your profitability in certain months.”
You must factor in the peso-dollar rate, increasing fuel prices, and the taxes you’ll have to pay into your budget. “Most entrepreneurs focus only on profit planning,” Ong says. Indeed, it’s equally important to make realistic estimates of your receivables (revenues and sales), investments and expenses (inventory, equipment, rentals, working capital, employee salaries, etc.) and to collect more efficiently. You must also manage your inventory well to make sure you don’t have too much or too little at any given time.