How SMEs Can Create a Better Budget

Regardless of the size or type of business, all businesses need to set a budget. This is especially true for small businesses.

If you own a small business, you must develop a realistic budget that can help you reduce unnecessary expenses and improve your profit margins in the long run. Here are some ways that an SME can create an effective budget:

1. Monitor Industry Standards

There are many similarities between businesses within the same industry. Therefore, you should do some research and scour the internet for data to gauge how SMEs in your particular industry are performing.

You may also talk to local business owners and visit the local library for more information. Also, visit the IRS website or find out how much revenue businesses are earning on average in your industry and the percentage of revenue that must be assigned to cost groupings.

You only need to look at average values since small businesses are more vulnerable to weak markets as compared to larger businesses.

2. Fill out a Spreadsheet

Construct a spreadsheet to determine the major costs as a percentage of your budget revenue. In order to get a good idea of reasonable costs, speak to different suppliers so that you can obtain a better estimate.  

But you should keep in mind that these are only estimates and they may fluctuate depending on business conditions. Based on these estimates, you can save a certain amount of money to prepare yourself for tough conditions. You may also need this money while you are expanding to new locations or hiring extra employees.

3. Cost-Cutting

If the expenses that appear on your spreadsheet are more than the industry average, then you must seek ways of lowering these costs. Prioritize cost-cutting for those items whose costs are more manageable. Purchase goods at the beginning of the new billing cycle so that you can benefit from easy payment terms provided by suppliers.

4. Periodic Review

Most SMEs draft their budget annually and analyze it occasionally. As a small business owner, you should check your budget more often to understand how your business is performing with respect to industry standards.

5. Check out Different Suppliers

In order to save money, do not hesitate to look around for better suppliers offering greater discounts. You should look for new suppliers at different stages, such as when carrying out business reviews and when setting the monthly budget.

6. Select the Type of Budget That is Best for Your Business

Use the accrual basis of budgeting for calculating your business’ net income. You can also set a budget for cash flow.

It is a smart idea to maintain both budgets to get the best of both worlds. Some businesses do this to track both net income and cash flow.

But whatever you do, make sure that everyone is involved in order to benefit from their insights.