Imagine a time in your business when you will never have to think about how much you are spending.
Is that even possible?
I’m glad you asked, because the truth is, no matter how much you generate in revenue, if you are truly vested in your business, you will want to know that you are conserving much more than you spend. This means that you will definitely be watching spending.
It therefore stands to reason that as a growing business, you cannot keep excusing bad spending decisions as a function of insufficient revenues. Whether you are a big business or an emerging business, there will always be lots of things great to spend on, but you will need to exercise great caution and discipline.
Let me go on further to say that in running your business, you as the business owner must ascertain your survival budget and then you also have to work out the survival budget for the business.
Your personal survival budget is what should translate to the salary the business pays out to you.
Now this very idea is a source of great irritation to many entrepreneurs. It really, really hits a sore spot. This comes as no surprise, because characteristically, it is more convenient for them to transfer money out of the business account to meet their personal needs as the needs arise. What this eventually results to is excessive spending by the business owner, and in many cases, the ultimate erosion of business capital.
Why survival budget?
It is a methodical process that ensures that the business owner gets to think through those necessities he must incur in a year for himself and his dependents. It does not take luxuries into account. The derivation of this amount will become a business cost known as his salary. This, the company can decide to pay out to him monthly or quarterly, depending on the cash flow pattern of the business.
If the survival budget far exceeds anything his business can pay out, then it means that he needs to seek alternate sources of income; for example, a part-time job.
This initial analysis of determining a survival budget has been ignored by many people when starting their business. So, what we see is that the business never really takes off, because the business owner attempted to meet his needs from insufficient revenues generated by the business.
Let us consider this illustration. Johnson Audu Chukwuma is a business man selling phones in computer village. He has a wife and two children. How should he go about deriving his survival budget?
He will need to pay attention to the cost of taking care of himself, his wife and his children in arriving at this figure. If he spends N40,000.00 monthly on feeding his family, N600,000.00 three times a year on school fees, N200,000.00 a year on medicals and another N700,000.00 a year on house rent, it then means that he needs a total of N3,180,000.00 (Three Million One Hundred and Eighty Thousand Naira) a year to survive. This means that the business needs to pay him a net monthly salary of N265,000.00.
The question now is, can Johnson’s business afford to pay him N265,000.00 monthly. Does he have sufficient gross margins from his sales to cover this salary as well as other business overheads and still turn a decent net profit?
This here is the analysis many budding entrepreneurs fail to engage in. Granted, it is painstaking, and may be a bit of a turn off, but it is very essential in planning your target revenue and your net profit goals as well.
In concluding, let me also say that you need to find out what it costs to run your business monthly. Knock off those things that the business can do without, and make sure everyone in the business understands that there is no endless well of money in the business. Expenses will need to be planned for in advance before they are incurred. Of course, the plan will include a provision for contingencies.
When you have set your business and personal survival budget in motion, remember to monitor performance at least monthly, so you can course correct where necessary.
Here’s to making your business immortal!
JOVITA MADOJEMU
Madojemu is the Managing Director of Pundit Bookkeeping Services; a company bridging the gap between emerging businesses and professionally prepared accounts. Jovita seeks to empower young businesses with financial intelligence, for business growth and sustainability.
Email – jmadojemu@punditbookkeeping.com
