Successful Entrepreneurs Learn to Manage Costs

2 November, 2009

High quality business management involves the understanding and tracking of both revenue and expenditures — leading ultimately to profits and success.

All too often entrepreneurs jump into new business ventures without creating mechanisms for understanding and projecting expenditures. Sales, revenues, and profits are concepts that seem easier to understand since an entrepreneur will certainly not succeed without them. However, expenditure management is equally important and, if ignored, can ruin a small business.

Decide What Needs to be Tracked

The first step in budget management is to determine priorities and how to track them. The most likely candidates will be personnel costs, office expenses, marketing / advertising costs, operating costs, and revenue from sales. However, each of these categories have sub-categories that are important to identify and track. For example, office expenses must include space leasing, telephone, internet, equipment and related costs, and supplies. Revenue from sales may include products, services, or residual activities. A careful business owner will break the broader categories down into their parts to better understand what costs and income are and how they change over time.

“Garbage In / Garbage Out” is Very Relevant to the Budgeting Process

As with other information systems, the ability to manage and forecast costs is dependent on the quality of the data being used. Accurate and reliable data must be obtained by creating tracking mechanisms for expenditures, not relying on guesswork or what some other company spends. For example, receipts need to be kept and used to document office expenditures related to office supplies. Marketing expenses such as automobile allowance and brochures must be tracked carefully to ensure that the budget figures and projections are realistic and reasonable. It is often very productive to include other staff in the budget process to obtain their perspectives on future revenue potential and true costs of operating the business.

Create an Initial Budget Projection and Then Track it Carefully

The budget projection is calculated by implementing the previous steps in the process including identification of the line items to be included and ways to collect accurate data. It is also important to decide on budget timing such as beginning and ending of the budget year and how often to evaluate and adjust the information. The calendar year is often used as the budget timeframe because of tax reasons. However, small business that work extensively with government entities may use their fiscal year which is often July 1 through June 30. Budgets projections should be formulated about one month before the beginning of a new budget period so that the most recent data can be used. Budget reviews then need to be performed at least monthly to adjust for changing conditions and to account for unforeseen expenses.

Budget Planning and Projection Need to Match the Business Plan and Strategies

Budgets need to be synergistic with the business’ overall plan and various strategies that have been determined to be effective. A comprehensive, relevant business plan is essential in laying the groundwork for all other activities including budget planning. As the business plan evolves to account for changing conditions and priorities, budget projections must adjust was well.

Budget Projecting is a Dynamic Process

The budget process is not something that can be completed annually and then put into a drawer to collect dust. Budgets must be created as tools for planning the future and identifying emerging problems and issues. For this reason, it is a dynamic process that must be reviewed, evaluated, and updated continuously to be relevant and useful. Budgets do not have to be complicated or rely on advanced technology although many entrepreneurs choose to go that route. The key requirements for a successful budget are for the data to be accurate, relevant, and reliable and for the process to be flexible enough to adjust to changing conditions and priorities.

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