Why your new business needs a budget

Why your new business needs a budget

When we supply a new company registration or a shelf company for sale, the offer frequently involves 6 months' free bookkeeping, followed by a health  check. Why the health check? Because many new companies start badly and need urgent corrective action in order to survive...

Here is a classic example of why your company needs a budget:

During the Christmas break, we did the books for the first six months of a specialised food supplier company. I noticed that every so often they would lend a few thousand rands to the company and on only a few occasions was any of it paid back.

So I was not surprised when I finally completed the 6 months and took a look at the Income Statement. Sure enough, the company was selling product at a little below the cost of the materials used to make it! Because it was not making any markup, the operating expenses were not covered and the owner had to pay for them out of his own pocket (which got recorded as loan account).

Here are the norms for most businesses - Gross Profit on Sales 40%. That equates to a markup on materials or purchases of 1.67

This can normally be expected to yield Net profit % of turnover before tax of 10%, which is generally accepted as a viable business. You should be paying reasonable salaries to yourself, your staff and any family members that work for the company. If not, then the profits aren't real and you'll get a false sense of comfort.

How do you overcome your "New Business Budget Woes"?

In order to ensure that you don't fall into a similar trap, draw up a budget before you start the business, and if you've already started, draw one up anyway. It's pretty easy to prepare a basic one -

Budget

Prepare a monthly budget for the first year and an annual budget for the following four years.

Be as realistic as you can, and once you spot the problem, fix it - because it won't fix itself!


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