Budgeting Tips for Small Businesses

IMA’s Hadeel Nassar and Gulshat Uspanova describe the essentials needed for startups to keep their finances in check.

                                                 

We all live in fast-changing times. The current crisis, oil prices decline, and overall stagnation in the business world leads the large corporations to shrink its sizes, run regular lay-offs, and cut off overhead costs and cost of product or service.

 

Meanwhile, the small businesses come into scene trying to fill in the gaps in the market. The new technologies, applications, and programs are currently developed by talented entrepreneurs, which raises lots of opportunities for the small businesses development. The business is open for new ideas, new ventures, and start-ups that offer newly developed products and services.

 

However, it was stated in Forbes that 90% of start-ups fail.

 

We would like to give some advice from an accounting perspective on how to be in the 10% of those start-ups who survive. We will highlight a few tips, based on our experience, on how the small businesses should address their challenges in surviving and succeeding in the business utilizing the accounting expertise and best practices.

 

When starting any new business, the first thing to be done, besides a marketing survey for the product or service success in the market, is the business plan. Before jumping into any capital investment, official registration, and establishment of an office, the starter-ups should evaluate the expected bottom line of the coming project. Unfortunately, there are a number of cases where the companies have a business plan in place, but still lack any clear idea of what should be its net goal. Opportunities are open to everyone but the competition rate is very high.

 

The next question that comes up is: How to survive in a competitive world?

 

The person planning a start-up should have a clear idea of what they bring to the market. They need to know the target market and respective market niche, who their main competitors are, the client base, how much would a customer pay for the product, and what are the associated costs to be aware of the potential net loss or net income.

 

To help them with that, the responsible finance persons within the company should be involved inthe project budgeting from the very beginning. The experience shows that quite often the business is up and running and then the owner starts thinking where the profits from the investments are and then starts seeking the finance assistance. When a business grows rapidly, but the accounting and reporting is lagging somewhere behind, it is very difficult to bring quality accountants on-board who could resolve the accumulated debris of their overloaded predecessors and ‘clean up’ the books.

 

Tip #1- Get a finance function support before the start of the venture, not after.  Engage the qualified accounting workforce and ensure that the internal controls are set up from the very beginning to have all the reporting correct, all major procedures outlined and compliant with the reporting standards, and all reconciliations tidy.

 

When the company is just starting, the zero budgeting technique could be used as it allows to estimate the expected revenues and costs without any prior experiences. However, when a company is up and running, the rolling budgeting technique is more appropriate for the use as having some history for referential purposes.  Continuously keep updating your budget vs actuals to understand the trend and explain the variances.

 

Tip #2 -  Be flexible and employ the most appropriate budgeting technique for your business. The CMA program has a special section of the exam that covers the various budgeting and forecasting techniques that could be a guide for the operations managers helping them to build the bridge to management accountants.

 

Tip #3 – Stay tuned to the changes on the market, in the political and social environment, (consider the STIRDEEP methodology – social, technical, industry, regional, demographic, economic, environmental, political aspects), and make prompt respective decisions to keep the business going as that is your advantage over large corporations. It could be too expensive to hire consultants, but nobody said you can’t monitor it yourself.  As information nowadays is public and easily available, read what the implications of latest developments are for your industry and check what needs to be done to get it implemented smoothly.

 

Tip #4 - Consider a break-even analysis for the small business operations, as it is an essential reality examination for the potential viability of the small business. A Break-Even Analysis helps a small business management to determine whether the overhead costs are realistic or need to be reduced.

 

Tip #5 - Prepare a full package for the Budget Statements Book as each of the statements is needed for the detailed plan which includes not only the revenues and costs, but also assets and liabilities with the respective cash on hand.  To finalize the budget package, the company should develop the key performance indicators (KPI) that are needed to motivate the management to achieve the set up goals.

 

 Tip #6 – Budget KPI or Balanced Scorecard. The executive suit should have SMART (simple, measurable, achievable, realistic, and time framed) objectives as their KPI. For example, the objectives that will be supported by the monetary incentives for the C-suit as the measure of the effectiveness of their management during the year.

 

The examples of the major KPI are:

DSO target of 30 days or less - to help the business recover its cash from the customers, management will negotiate better terms at the stage of signing the contract, and ensure that management sets up the client relationship with customer’s management level, and the company’s in-house finance team sets up a good working relationship with the customer’s payable finance team to ensure timely settlement of invoices. DSO should be always lower than DPO (days payables outstanding).  

 

- Equipment utilization rate - to recover its depreciation costs, to ensure there is enough sales contracts in the pipeline to avoid equipment idle time.

 

- Gross margin at the most efficient rate - would be a good incentive for management to run competitive tenders in order to find right suppliers of the best quality raw materials/ labor costs at lower prices with favorable payment terms, which would reduce the variable costs.

 

- Fixed & overhead costs limit -  which indicate the effective spent on the sunk costs for the business and should not be exceeded

 

- Inventory turnover ratio - as an indicator of the effective management of the inventory stocks, because high level of inventory lead to excessive storage costs, and undersupply of inventory may cause delay in the production process.

 

KPIs should be the focus of the management team to help the business cover its costs and generate cash for the day-to-day operations.

 

Do not economize on the expertise, and do not underestimate the importance of time spent on the annual/ quarterly budgeting and scenario planning exercise, as good planning is half of your success. The other half is its execution. Comparing actuals vs budgeted numbers will serve as a good indicator for the trend of activities and the ability of the management to materialize the potential budgeted revenue pipeline, correctly estimate cost of running the business, build right incentives and make vital timely business decisions.  

 

About Gulshat Uspanova, MA, CMA

Executive Director at IMA Dubai –UAE Chapter

Gulshat is a finance professional with more than 15 years of international experience.

Gulshat holds a Bachelor’s of History and English, and a Master of Arts in Economics, from Kazakhstan Universities and a CMA certification from the Institute of Management Accountants USA (IMA). She started her finance career as an external auditor in one of the Big 4 audit firms in Kazakhstan, and then joined a global Big 3 Oil & Gas services multibillion public company, where she worked for more than 10 years cumulatively across Kazakhstan, Russia, Azerbaijan, UK, and USA. She is currently working in the healthcare sector in Dubai.

She has vast experience of working at all levels within a finance organization from country, regional, and corporate levels. She has also worked with a start-up oil company and a hospital in Dubai, improving the processes, developing business specific procedures, implementing ERP systems and internal controls, and building and coaching finance teams.

She is currently promoting the IMA CMA program, running monthly events by the IMA Dubai-UAE Chapter for the finance professionals in Dubai, and serving as Chapter Executive Director.

 

About Hadeel Nassar CMA, CIA, CPA (Candidate) and MA (AUS)

Hadeel is a management accountant, trainer, and translator. 

She has extensive professional experience in the field of management accounting in both the private and public organizations in the United Arab Emirates. She holds the certified management accountant (CMA) and certified internal auditor (CIA) certifications, as well as a master degree in Arabic - English Translation and Interpretation from the American University of Sharjah (AUS) and a BA degree in accounting from Al Yarmouk University, Irbid-Jordan. 

Hadeel made multiple contributions to enhance the profession of management accounting in the region using her translation skills. She is currently the Management Accountant at Moorfields Eye Hospital Dubai, a hospital founded in London over 200 years ago and is a pioneer and world leader in eye care.

Hadeel joined IMA Dubai-UAE chapter in 2012 as the Vice President for Events followed by the Vice President for Communication in her second term in 2013. She volunteers her time and effort to keep IMA members in Dubai updated with essential business knowledge, raise their skills through professional education events, and build awareness of the CMA certification.

 

 

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