BACK TO HOME FREE 15 MIN CONSULT Login

A Budget might not be enough for your Business. Other Items you need to know.

Uncategorized Jun 23, 2022

When Starting up, a Budget is critical for a company's success. As a company matures, yearly budgeting keeps a company apprised of its expectations towards its stakeholders. 

But, is budgeting enough for a company's success? The short answer is no.

Let's first start to look at the budgeting process. 

 THE BUDGETING PROCESS

 Depending on the stage and type of business, there are different ways of creating a budget.

In any process, it is critical to identify the users of the information as well as how to gather the information effectively. 

So, before deciding what budgeting process to follow, try to determine who will be the users of this information and how they will be using this information. 

For example, if you are a startup and have no prior data regarding what your expenses will be like, you will likely need to follow a process called zero-budgeting. 

 THE FIRST STEP

When doing a budgeting exercise, the first step is to gather information about the variables. i.e Sales, Variable Costs, and Fixed Costs.

Volume

If you are starting up, you need to undertake market research to determine:

1) The Market size

2) Your market share.

There are several methods to estimate these such as using past data with an indexation rate. (e.g # of shoes sold in Canada in 2021 with a 1% growth rate based on expected population growth)

The market share can be determined through interviews, sampling, etc.

In an ideal world, you would access a leading market research firm to provide you with your required data to estimate your volume.

Due to its cost, though, this may not be feasible for many startups. 

Low-cost market research techniques:

- Interviews

- Sampling 

-  Online Surveys

- Reach out to online communities 

It is important to undertake this step to make sure that your idea will make it to market. 

Once you have determined your Sales Volume, you need to determine your Production Volume.

As you will always need to have some products in hand, your Sales and Production volumes might differ.

This is not the case for service-based businesses.

Once you have determined your Volume, you can budget for your costs. 

 Costs can be broken down into variable and fixed costs.

Variable Costs

Variable costs, as their name implies, vary with the level of production or sales. 

There are mainly 2 types of variable costs. Variable production costs and variable selling costs. 

 Fixed Costs do not vary with production levels.

 

Revenue

To estimate revenue, you need to estimate your Selling price. The Selling price is determined by market forces or is a product of costs. 

 

Budgeting Cash flow

When starting up, companies incur many capital expenses. It is critical to monitor cash for a business. 

Ideally, if a business is making a capital expense that will last for years, it should look for ways to finance the asset with the returns being provided by its use. i.e pay for the capital expense as the asset generates income. This is done through financing either through debt or equity. 

However, many new businesses do not have access to such funding and need to rely on personal funds. It becomes critical to ensure a cash flow budget is done. 

Here are the reasons for monitoring cash flow:

- There is a delay in producing goods and selling the product

- Financing costs may be higher for startups

- Owner/Manager remuneration is dependent on a healthy cashflow.

- Cash flow may be low at the beginning and financing scarce

 

While a budget is helpful, it is important that alternate scenarios be anticipated.

Hence, the need for a sensitivity analysis when it comes to budgeting. 

Sensitivity analysis shows the financial position of a company if the Variables being looked at change for whatever reason, e.g a pandemic. 

Trends and Variances

Economic conditions constantly change. When comparing scenarios, businesses can identify risk mitigating opportunities to improve bottom-line such as inventory obsolescence or material price fluctuations. 

Quick Walkthrough of a Budgeting Process for a Business Plan

- Market research to estimate Market Share and Size

- Sales/Production Volume Estimate

- Cost estimate

- Revenue Estimate

Basic Cash Flow Budget :

Cash from Operations

Cash Received from customers LESS

Cash paid to Suppliers

Investing Activities

 - Capital Purchases & Sales

Financing

- Funding received - Debt/Equity 

- Debt/Equity repayment

- Dividends paid

 

Have you created your 12 month budget yet? It is simpler than it looks. 

 A small business needs clear direction. If you are looking to plan, start or grow a business; you need an accountant on your side.

Bhundhoo Tax (BHTAX CPA) is a Chartered Professional Accounting firm located in London, Ontario offering services across canada virtually.  

 

Close

50% Complete

Join our waitlist and receive a FREE copy of our business planning checklist. Plus, be entered for a chance to win a FREE QBO Plus subcription for 1 year ($500 Value) 

* Applies to new Canadian Subscriptions to QBO Plus only.