Every business, big or small, needs funds to ensure smooth operations and overall success. And for small business owners to be financially prepared, strategic budget planning is necessary. This process involves creating a spending plan based on the business’s projected income and expected expenses.
However, budget planning can often be daunting, given the need to analyze financial insights thoroughly to make informed decisions regarding allocating resources to all business activities, especially critical growth areas. And in some cases, the lack of sufficient funds may necessitate scouting for external financial resources to bridge budget deficits.
Access to external finances makes it possible to execute a growth-oriented business budget. Trade finance, for instance, is a popular option used by importers and exporters to bridge financial gaps. The main differences between trade finance and other business credit products, such as small business loans, lie in the parties involved and turn-around time. With trade finance, one must prove to the financing institution the existence of a buyer or importer and a seller or exporter. That said, transactions should have features, such as purchase contracts and shipping details, to name a few.
Trade finance also facilitates quick access to working capital. Business owners can apply for trade finance to facilitate international trade processes, such as shipping, insurance, or paying for other production costs like raw materials and machinery. Entrepreneurs also use trade finance to protect themselves from the unique risks of international trade, including currency fluctuations and non-payment.
Trade finance enables a business to fund various aspects of its budget, to achieve short and long-term fiscal objectives. Despite that, small businesses in need of trade finance may find the market limited because fewer banks offer the product today. However, a reasonable number of dedicated financial institutions still offer trade finance in Australia.
Budget Planning Basics
Developing a comprehensive periodical budget can give business owners a bird’s eye view of the company’s financial estimations during a forecasted period. It enables prior planning and execution of various activities, such as preparing documents required when applying for business financing products.
A reasonable budget also allows business owners to preempt problems before they happen, for instance, minimizing the chances of a cash flow or working capital crisis by approaching small business lenders. Other benefits of an effective budget include improved decision-making, performance monitoring, and better financial management. In addition, a solid budget also casts you in good light to potential investors or lenders.
With that, the following are essential tips for planning your business’s finance:
- Consult Your Strategic Plan
To guarantee that you remain on course, your starting point for every business planning activity must be your company’s strategic plan. Your strategic plan reminds everyone involved about your mission and vision, which are the main reasons the business exists. The company’s budget should aim to support the company’s overall strategy and growth prospects.
- Gather All Your Financial Information
Using insights from other financial documents to make business financial decisions is also imperative. Hence, you’ll need to collect the following financial information to develop a realistic budget:
- Revenue: Use sales data from the last three to five financial periods to make revenue projections for the current budgetary period.
- Fixed Costs: An analysis of current time-based costs such as wages, rent, mortgage, insurance premiums, and utilities can help you project future fixed costs with great accuracy.
- Variable Costs: Fluctuating periodical costs should be budgeted carefully and monitored closely because of their potential to affect working capital. Your profit and loss statement can highlight your most significant variable expenses.
- Profit Margin: Analyzing your current profit margin may help you rethink your costing strategies, especially where current margins don’t support projected growth levels.
Aside from those, you can also take note of direct expenses for any special projects or initiatives. Ultimately, these insights can allow you to make prudent decisions for your business’s spending plan.
- Get Shareholder Approvals
If your business has other shareholders, it’s critical to seek their approval and keep them informed about budget performance to increase trust levels and safeguard against team member fraud and misappropriation of funds.
- Review Your Budget Frequently
A realistic budget should be dynamic to suit changing circumstances in the external or internal environment. For instance, small businesses undergo rapid changes and growth that must reflect in the budget document. That said, reviewing and revising your budget is critical to guarantee that ongoing decision-making processes are based on an updated budget.
Ideally, you must regularly compare your budget figures for income and expenditure against actual performance and deal with significant variances immediately. Budget variances may expose weaknesses in the planning process, while in other instances, they might be due to unforeseen circumstances like abrupt price changes in raw material prices.
Budget planning is an essential aspect of business planning that enables entrepreneurs to anticipate problems, pitch for investment opportunities, and monitor financial performance against objectives. An effective budget that organizes financial information in one place allows business leaders to plan with deeper insights to seal financial gaps that can adversely affect performance.
A realistic budget planning process offers many benefits to business owners, including facilitating access to working capital through trade finance or other small business loans. This article highlights good practices to keep in mind to help ensure the financial health of your small business.