Small businesses need to embrace budgets

The writer is co-founder of footwear brand Sante + Wade

Being a small-business owner I am being pitched new opportunities all the time.

From proposals for a new virtual office to an in-flight television advertising campaign and an introduction to an ecommerce fulfilment centre, these are a few examples of what lands in my inbox every day.

But one woman’s opportunity is another’s profligacy. Which proposal you choose to grab with both hands should be about your company’s core values and, just as importantly, about your budget.

But how many small businesses have put formal budgets in place?

According to a survey by Clutch, a US research and ratings company, half of small businesses did not create a formal budget in 2020.

Amir Absoud, founder of Upstreamly, an advisory and accounting company for the oil and gas industry, says it is a similar picture in the UK.

“I find that businesses with lower than five employees do not tend to budget but rather manage their business and costs informally,” he says.

Once the model is built in the first year of budgeting, it can then be reused . . . The first time to put a budget together is often the most challenging

As for why small businesses might fail to implement them, Absoud suggests a variety of reasons, including “a lack of knowledge about putting one together, the time commitment required and the general lack of understanding of how it can add value to the business”.

Mine was one of those small enterprises that took a more relaxed approach to budgeting at the outset. Let’s face it, the word conjures up images of deprivation and denial. A place where freedom and creativity is stifled. On a practical level it simply did not feel like a priority in the early stages of our development.

I suspect for business owners who have left large corporations to set up their own enterprises, formal budgeting may seem restrictive, with echoes of the past they have left behind.

“It can lead to constraints and suboptimal decisions being made,” adds Absoud. “Furthermore, it can be seen as a distraction from undertaking other tasks like business development.”

In the start-up phase, the costs of a small business can be easier to track, but as a business starts to evolve, a change of perspective is usually required.

Budgets can help with focus and ensure staff are all working towards the same goals. It is a way to monitor cash flows, ensuring you have enough financial resources to meet any challenges ahead and take advantage of opportunities when they present themselves. And if you have plans to raise investment or debt funding, you won’t get through the door without one.

It is also worth noting they don’t have to be complex to be effective. Absoud says that regardless of the type of business, a budget need not be very detailed to be constructive. “Once the model is built in the first year of budgeting, it can then be reused . . . The first time to put a budget together is often the most challenging.”

For any business without one, now is the time to talk to your accountant or take advantage of any number of free online resources that can assist in putting one together. With inflationary pressures in all areas of the economy, budgeting should be a priority for all.

Small companies are particularly vulnerable to inflation. Like consumers, they will be similarly hit by rising energy prices, as well as by increased supply chain costs such as shipping and raw materials.

Many will try to pass those increases on to the consumer. Yet without the purchasing power of the biggest companies, there is only so much room for manoeuvre. Most SMEs will have to absorb some of the increased costs so as not to lose customers. Effective budgeting can only help to manage the impact.

Of course, creating a budget is just the first step. Sticking to it is the wider challenge. Small businesses are not so different from the people who run them. Sustained belt-tightening is a sure-fire way to kill morale and demotivate staff.

But I have found it helps to think of budgeting less as the imposition of rigid structures and more as adding a level of rigour and financial discipline into the business culture. It takes a little getting used to, but it is within those constraints that entrepreneurs will find freedom.