Learning how to build a budget for your franchise is one of the most important things for any new franchisee to get to grips with. A good business budget is one of the cornerstones of managing your finances. In this article, we’re going to take you through the basics of budgeting as a new business owner or franchisee.
If this is your first time running a business or you’re not particularly financially savvy, building a budget for your franchise probably sounds overwhelming. However, if you want to run a successful franchise unit or independent business, it’s one of the most important bits of planning you can do. Managing your finances and cash flow is crucial and a budget lays out exactly how much you can afford to spend in one easy place.
There’s no need to feel overwhelmed. We understand numbers aren’t everyone’s strongpoint, but a budget does not need to be complex or confusing to be effective. Here are our tips for building a business budget, whether you’re completely new to franchising or want to get your finances into shape after a tricky trading period.
What does a budget consist of?
There are three key parts to any good business budget:
- Sales and other revenues
- Total costs and expenses
‘Sales and other revenues’ covers any money that’s coming in. According to inc.com, the best way to predict your annual revenue is to look at last year’s sales figures. Be conservative in your estimation – it’s better to beat your target than feel underwhelmed when you fail to meet an unrealistic target.
If you’re just starting out, your franchise should have showed you financial projections from other franchisees or you can ask around in your network, so you can use these as a rough estimate for your first year. Alternatively, use market research to gauge an average first year for a business in your sector – but be aware this strategy could be very inaccurate.
Next, total costs and expenses. This can be a tricky one, but it essentially covers all the money you’ll need to pay out. Divide your outgoings into three categories: fixed, variable and semi-variable. Fixed costs will stay the same throughout the year, regardless of your performance, and include things like rent and insurance. Variable costs go up or down depending on your sales – expenses like materials/products, inventory and freight fall into this category.
Lastly, semi-variable costs need to be factored in, which are largely fixed costs that can go up or down during quiet or busy periods. Salaries (or bonuses), advertising costs and telecommunications fees are some of the most common examples.
The final component is your profit estimation. You can work out a rough profit figure by taking away your costs from your revenues. If you’re struggling, you can enlist the help of an accountant, who will sit down and work out your budget with you. But if you’re happy to have a go at making your own budget, it’s a relatively simple process.
>> Read more:
How do I work out my business budget?
The most important thing to consider when planning your business budget is that you need to use common sense. No matter how amazing your franchise or business is, there’s no point predicting you’ll generate £1 million in revenue if you barely managed £50,000 last year.
Start by coming up with a realistic estimated figure for the year’s revenue. Don’t worry about being 100 percent accurate – budgets are rarely ever bang on as it’s hard to predict what will happen in a year without a crystal ball. Instead, plot a range (say £10,000 - £15,000) that you can reasonably expect to generate.
Next, plot your expenses against your predicted revenue. Split it into fixed, variable and semi-variable. Once you’re done, you can take away your expenses from your revenue to get a rough gross profit margin. It’s hard to get a reliable figure if it’s your first year in business, but a negative profit figure is a sign your spending is too high and could lead to negative cash flow. You may need to cut back on staff costs, find a cheaper supplier or up your marketing efforts to increase revenue.
Your franchisor should have given you an idea of when you’re likely to break even and start generating a profit. Don’t panic if you don’t make much of a profit in your first year. It can take an average of two years+ for small business owners to start generating one, though franchisees tend to become profitable much more quickly.
Why do I need a business budget?
Not sure a business budget is worth the hassle? You’re not alone. According to a survey by Clutch, 74 percent of businesses with fewer than 10 employees failed to make a budget in 2018. The same survey found 37 percent of small businesses that did make a budget ended up spending more than they planned anyway.
According to Rhett Molitor, co-founder of Basis 365 Accounting, many small business owners (such as franchisees) forget to budget because they’re too caught up in their newfound freedom.
“A lot of people create their own small business because they don’t want to work for a corporation. They want to do their own thing. You don’t really want to hold yourself accountable to anything because that’s what you’re trying to escape.”
However, according to Wanda Medina, founder of digital accountancy, marketing and admin company Maventri, a budget is crucial.
“Having a budget keeps everyone working toward the same goals and helps scale your business. From month to month, you’ll be able to improve and get back on track. If your expenses go up, you’ll know why, and you can fix it next month.”
Essentially, you’re financially blind without a strong budget. It’s going to be much harder to track your progress, both positive and negative, against your predictions for the year or month. You’ll also have trouble growing your business, as you won’t have any idea of how much it’s likely to cost to scale up your operations. A budget gives you a clear vision of your spending and will let you keep on top of it before it becomes a critical problem.
>> Read more:
When should I make a budget?
It’s a good idea to make an annual budget every year. Many people like to set their budget at the start of the financial year (April) or the calendar year, but there’s no wrong time to do it. If you’re starting your business in August, it makes sense to begin your yearly budget there. Your yearly budget should be divided up into 12 months, but you could also divide it up into quarters too.
Lots of business owners also find it helpful to make a monthly budget, particularly if they have lots of outgoings every month that need to be tightly monitored. Your monthly budget won’t need to be as in-depth as your yearly one and, if your costs are stable year-round, may not even be necessary. But make sure you’re tracking your monthly progress against your budget to see whether you’re on track or not.
You should also re-evaluate your business budget if any significant expenses are coming up, or your situation changes. Let’s say you need to buy a new piece of equipment. Your budget will show you where you can cut back in order to fund your purchase. And on the other hand, if a fixed cost like rent goes down, you may find you’ve got the money to give your staff a pay rise, or to invest in expansion plans.
Budgeting for beginners
Budgeting can be intimidating for new business owners, but it’s not something you have to take on alone. There are loads of free resources out there you can use to get started, and fellow franchisees and entrepreneurs will likely have plenty of great tips.
Don’t be embarrassed if you need to sit down with an accountant to work out your budget. It’s particularly hard to plan a budget for your first year in business and the nature of your franchise unit or company might make it complicated to plan for subsequent years too. Whatever you do, just don’t neglect your budget altogether. It could be a fatal mistake for your budding business.
See Part 2 of this series to find out more about the steps you need to take as you craft your budget.
If you’re ready to take the plunge, check out our UK franchise directory to find the ideal opportunity for you.
Sophie Cole, Point Franchise ©