Why your business should be operating a profit-first budget

Small-business owners need to “eat their vegetables” by ensuring their business is set up to make a profit first and foremost. While it might sound like common sense, in my experience too many small businesses are so focused on sales in their early years, they don’t know how much those sales are costing them.

They’re so focused, in fact, they’re willing to spend almost anything to make sure those sales happen. I’ve come across so many SME owners who spend money on mostly needless expenses that might make them look successful, rather than being successful. Then at the end of the financial year, they head off to their accountant, hand over their sales and expenses and hope there’s something left over.

Part of the problem is that doing budgets and crunching the numbers isn’t exciting or glamorous, which meant many SME owners ignore it or don’t give it their full attention, preferring to focus on the sugar rush of making a sale. Just like eating your vegetables, though, making sure you give plenty of attention to your budget might take a bit of effort and discipline, but it will pay off in the long run.

The problem almost always exists at the beginning – you have an idea, you’re excited to make sales – it’s natural to think that you’ll worry about the numbers later. But that’s putting a lot down to chance. By putting profit at the centre of your budget rather than sales, you’ll set yourself up for success in any climate.

Here are some tips for anyone in the early stages of running their own business to ensure they set themselves up for success:

• Work out what your cost of delivering a sale is: Calculating the exact expenses and costs that went in to making a sale will help you establish its value beyond the dollar figure of the sale itself.
• Make sure your sales forecast is conservative: You need to ensure that your model can survive even if the economy is poor or demand is lower than expected. If you’re relying on an optimistic forecast for success, you’re putting your business in jeopardy.
• Stay thrifty during the good times so you’re prepared for a downturn: Lots of businesses are constantly operating on a “best-case scenario” – the highest projected sales or the lowest possible costs – and when a downturn hits, they simply aren’t prepared. A profit-first budget will help you to make hard decisions now so your life is easier later.
• If you aren’t a numbers person, find someone who is: If you find this kind of budgeting and accounting isn’t your strength, find a way to bring someone on board who can do that work with you. Most business owners have strengths in one area or the other, but balance is the key.

The other point to consider is that if you take a good hard look at your budget, you might find that your business isn’t sustainable. It may simply cost too much to deliver what you’re getting in sales. But even if that’s the case, you need to establish it as early as possible. Burying your head in the sand and hoping things improve is a recipe for disaster.

By making profit the centre of your operation, rather than sales, you can ensure your business is sustainable for the good times as well as the hard times.

Jamie Cunningham, Business Coach