In this Franchising 101 article, we take a look at why tracking your expenses and building a budget is so important and how to build a budget that leads to long-term success.
It’s widely considered in the business world that before you can make money you need to know how you are going to spend it. Building a budget is important in order for your most ambitious entrepreneurial dreams to materialise in the real world. It means you can effectively track your business expenses and work out how much revenue you need to keep your franchise afloat or, better still, grow.
Putting pen to paper – or fingers to keyboard – and getting your numbers in check increases your chance of succeeding significantly by predicting future needs, profits and cash flow. It can also help you notice any issues that may arise further down the line. Let’s now take a look at the basics of budgeting, delve even deeper into why it’s so crucial for financial success and how to build a budget.
What is the purpose of a budget?
- Control your franchise’s finances
- Estimate how long it will be before you’re profitable
- Make sure that your franchise can fund current commitments
- See if you are meeting objectives
- Make confident financial decisions
- Check that you have enough money for future projects
- Make your business more efficient
>> Read more:
Why is a budget important?
Budgeting restricts any spending that isn’t part of your budget plan. It estimates revenue and plans for expenditure. By building a budget, you can make sure that you are allocating your money in a way that supports your franchise’s goals and objectives. It also means that everyone in your team can understand your franchise’s priorities. By involving the team in creating and reviewing the budget, you’re sharing the brand vision and gaining information that emphasises the business’s strengths and weaknesses.
Budgets help you predict slow months and keep you out of debt. They also highlight funds leftover that you can reinvest.
If you are operating your franchise without an effective budget in place, there’s a chance that you aren’t meeting your long-term goals, and are instead, running in circles focusing all your attention on getting by day to day. If you dedicate time to setting a budget now, you will have the best possible chance of reaping the rewards of your hard work.
When describing why a budget is so important, Victor Butcher, a financial expert and former president of the Tennessee Society of Certified Public Accountants’ Memphis Chapter said:
"You need the roadmap to understand where you're going with your business.
"It's like being in a car without a map or GPS system… you hope you’re going in the right direction, but you don't know.
"It would be stupid not to share this with employees. Everybody should know what the goal of the company is. It's a group goal… Don't expect your staff to meet your goals if they don't know what they are."
Tips for creating a budget that leads your franchise to financial success
1. Analyse your revenue
The first thing you need to do is look at your business and its income sources. Add all of them together so you can see what money is coming into your business each month. When doing this, calculate for revenue, the money that comes in before expenses are deducted, not your profit, the amount that remains after expenses are deducted.
Calculate your monthly income for at least the last 12 months (if you can). With this information, you can observe how your income changes over time. Are there any seasonal patterns? If anything stands out, you can prepare in advance for tougher months.
2. Add up all of your fixed costs
You now need to add up all the costs you pay out on a recurring basis, whether it’s daily, weekly, monthly or yearly. These will include rent, payroll, supplies, insurance, taxes and depreciation of assets. Once you’ve made a note of all of these, add them up and take them away from your income. Now on to step three…
3. Factor in your variable expenses
Variable expenses change depending on how much of a service you use, for example, utilities. You might find that expenses that aren’t actually needed to operate your business fall into this category. In other words, discretionary expenses; added extras that can further your profitability. These might include, your salary, office equipment and marketing costs.
4. Prepare for the unexpected
You need to set aside a contingency fund for any unforeseen costs. Unfortunately, they often spring themselves upon us when money feels tight. In order to avoid an incredibly stressful situation, you should make sure you have put some cash aside and planned for such contingencies in your budget.
>> Read more:
- 5 Qualities of a Successful Franchisor
- 4 Things Franchisees Never Have Time for But Are Essential for Running a Successful Business
- How to Launch a Franchise and Get Noticed
- 4 Elements of a Successful Franchise
- How to Start a New Business on a Shoe-String Budget
- The Ultimate Guide to Franchising Success
5. Develop a profit and loss statement
With all of the information you’ve gained from the previous steps, you can draft a profit and loss statement. Don’t fret - you’ve done most of the hard work already. All you need to do is add up all your income and expenses for the month and then subtract the expenses from the income.
6. Prioritise your investments
Make sure you focus on spending that will promote the growth of your business. What will bring you the most rewards? Training staff? Buying new software? Hiring a consultant? Remember that the money being spent should bring a return to your business.
7. Have regular budget reviews
You need to review your budget as often as possible so you can keep an eye on your progress. Lots of businesses don’t stick to the budget because as soon as they’ve finished writing it, they put it away and only come back to it when the business is experiencing financial difficulties. It’s much better to be proactive, not reactive.
Reach financial success with these seven steps
Hopefully you now have a better idea of how to build a budget and why it’s so fundamental in the first place. Don’t forget that a budget is important to keep your finances under control and not overspend, risking putting your business in debt. Want to read even more about building budgets? Check out part one of this series.
Becky Martin, Point Franchise ©