Budgeting and Business Planning for SMEs

Chapter 1

What is business planning?

Britain is a startup nation. Every year around 660,000 new businesses are registered in the UK. That’s the good news. The bad news is that 20% of those businesses will have folded at the end of their first year, and 60% by the end of year three. 

There are all sorts of reasons for an SME to fail, from bad credit to the wrong location. But something entirely avoidable – poor planning and budgeting – is an alarming factor in many business failures. 

It’s true that if you’re starting a business, you need a plan. But according to one study, a quarter of UK SMEs don’t bother to use one. Another revealed that 49% of SMEs have failed to identify any Key Performance Indicators (KPIs), a key ingredient of any accurate budget forecast.  

No business planning, no future?

Creating a business plan requires time and attention. It also requires continual updating as your business evolves.

But startup founders can get too caught up in the day-to-day minutiae of running a new business to bother with a plan or even proper budgeting. Some don’t see the value: surely their time is better spent attracting customers and making sales? Planning can come later when the storm dies down.

Of course, it never does. And without a plan, an SME has no clear path to the future, no way to measure performance, and nothing to guide decision making. That makes it easier to drift, overspend or under invest, and focus on the wrong priorities.

A business plan is not an optional extra – it’s essential. So what exactly is it?

What is a business plan?

At the start, a business plan is a document explaining clearly:

It should include early budgeting and forecasts.

But it is also a living document. Those early forecasts almost certainly won’t be accurate! Business planning should be an ongoing process, a regular exercise in stepping back and thinking about your business rather than being knee-deep in it. As your business evolves, your plan evolves to inform and guide it.

And you’ll need the data to do so.

At the heart of any business, planning is a set of KPIs relevant to your operation and crucial to accurate budgeting. These are updated as your business grows. There are scores of potential KPIs for all aspects of a business, but focusing on a few fundamental ones will give a new business most the kind of basic data it needs to survive. 

Basic financial KPIs include:

Cash from sales is your lifeblood and – needless to say – should go up over time. What happens to sales when you advertise in certain media, make a price change or attend industry events? Are there seasonal peaks and troughs? For new businesses, sales trends can help to set strategy in many areas.

Profitability is the proportion of profit to expenses. Sell less than it costs to deliver your business activities and you’ll have negative profitability- a loss. Sell more and you’ll head into positive territory. Profitability shows whether you’re getting more or less successful over time. 

It’s particularly useful to calculate gross profit margins (GPM) as a proportion of sales. How much are you keeping from every sale, and how much is being spent with suppliers? Tracking this KPI shows if you are overspending on supplies, a situation which might necessitate a cut in overhead costs or a price increase. 

You need to have enough cash to pay overheads, suppliers and wages, or you’ll quickly get into trouble. Accurate cash flow forecasting makes sure you do. 

A healthy cash flow means you always have enough money in your reserves to pay your way. Do your cash reserves and projected income cover predicted costs (with some to spare in case the unexpected happens) for the month or quarter ahead? Perform regular cash flow forecasts so you can identify potential shortfalls in advance and make necessary adjustments.

Chapter 2

Non-financial KPIs

Finance KPIs are easy to get hold of. They will usually be clear from your accountancy package. But there are plenty more KPIs of varying degrees of easy access to give you the insight you need.

Sales pipeline (and drop-off)

Where are your next customers coming from? How many leads convert into sales and which closing strategies work best? Analysing your sales pipeline will give you an idea: work out e.g. your “cost of sale” – how much do you have to spend to get an interested party through the door, and how many of these convert into paying customers?

Equally, it helps to know where customers most often drop out of the process. For example, it could be that your marketing emails pique interest, but your website leaves potential customers confused. Or that you get plenty of calls but few bookings, suggesting that better sales training might increase your success.

Market share

How are you performing against direct competitors?

Staff retention

High staff turnover is expensive and potentially damaging. Measure staff churn and compare it to industry averages.

Customer satisfaction

The more satisfied your customers, the more likely you are to enjoy long-term success. You can measure this by calculating repeat business, or by customer retention figures if you operate on a subscription model. Or do it more scientifically via a feedback form, if that’s appropriate. This is a hugely important metric. According to Harris Interactive, 89% of consumers have switched to a competitor following a poor customer experience. 

Employee satisfaction

Happy employees give their best for your customers and your business. They also stay with you, avoiding expensive and disruptive recruitment drives. In a very small business, you may have a feel for your employees’ satisfaction levels. As your business grows, you may need to measure it more systematically, and take action to arrest growing rates of dissatisfaction or disconnection.

KPIs and your business

Other useful metrics depend on the nature of your business. For example, an online business needs to think about conversion rates from website traffic and shopping cart abandonment rates. 

By contrast, a tradesman would be better advised to measure things like profit per hour and the average time it takes customers to pay. 

The KPIs you choose should also be:

With all these metrics, financial or otherwise, it’s crucial to identify trends over time and take remedial or reinforcing actions as appropriate. And then continue measuring and refining the process all over again.

Chapter 3

The business plan you started with (or should have)

You should have started with a business plan. If you didn’t, create one now. It doesn’t have to be complicated. It simply explains what you’re going to do, for whom, how, and how you’ll make money from it. 

There are two kinds of business plan…

A business plan for investors

If you’re asking for money from a bank your plan needs to be thorough. As well as basic details of your business, it needs an in-depth market analysis, a marketing strategy, a management summary and detailed financial analysis. 

Happily, that’s not the kind of business plan we’re talking about here…

A streamlined business plan

This is a business plan for you, and it’s much briefer. It’s a roadmap of where you’re going and how you’ll get there, and like a roadmap you’ll need to refer to it often. A business plan is a living document that will change as your business evolves, taking into account forks in the road, new opportunities and unexpected detours.

So let’s write one. Here’s what it should include…

Description at the outsetWhat might change over time?
What do we do, and how?What is your product or service?Crucially, what makes it different from competitors?You should always be looking to get better. Upgrades to your product or service should be detailed in your plan.
Who are your customers?Describe a typical customer. Detail the size of the opportunity (how many people are potential customers?). What are the key market trends that will impact your business? Growth may require stealing market share from competitors, selling into new sectors or territories, or, if you’re offering something truly new, getting people to believe in it. Detail these efforts.
Who is the competition?Is the market fragmented or dominated by a few large players? How do their products/services differ from yours? How do you differentiate – price, quality, reach?What lessons can you learn from them?Companies go bust. New competitors emerge. Keeping on top of the competitor landscape requires constant vigilance.  
How do we reach customers?Where do you position your product or service compared to competitors? Decide on the sales channels you will use. What is the sales cycle?How will you promote yourself? And what will it cost?KPI analysis over time may show that – for example – online sales are worth a greater focus compared to telesales. Update your plan accordingly. A lot of early sales and marketing is trial-and-error (or via connections) until you grow a mechanical process that works at scale. 
How much do we charge?Explain your pricing policy and the research you carried out to determine it.What evidence do you have that customers are, or will be, prepared to pay your planned fees?And are you “leaving money on the table” by under-charging? A price reduction may boost sales. Alternatively, suppliers may put their own prices up. You may have to react to a competitor. SMEs should continually check their prices against market averages.  
Who’s on the team and what do they do?Highlight your management team and key staff, highlighting their strengths and experience. Know your staff retention rates and training plans.Identify the people you might need to grow the business. Your recruitment and training plans will evolve as the business grows and new skills are required. 
What are the overheads?Overheads are the costs of running a business whether you make any sales or not. This includes your premises, equipment and suppliers. Are costs competitive? Do you have the capacity for growth?How will overheads grow as your business grows (usually an evolution in sales will sometimes need a sudden large investment in facilities).Your overheads will change as your business evolves. On the one hand, growth should lead to economies of scale. On the other, it may also require larger premises and better equipment.
How much money are we making, and why?Detail profit and loss, cash flow, expenses and sales, and explain them. What sales channels and marketing methods are most effective? Which costs have unexpectedly risen?Where could costs be cut? What lessons can be learned?Is remedial action required to stop a problem turning into a crisis?Seasonal peaks and troughs, new competitors, offers on price…it’s vital to continually monitor KPIs to know what works, what doesn’t and where efficiencies might be found. 
What does the next month/year look like financially?Forecast a few months ahead in terms of sales, profit and cash flow. (This used to be up to three years, but few businesses have that sort of vision these days!) Explain your assumptions.Accurate forecasting is an ongoing task. As circumstances and KPIs change, so will your forecasts. Keep on top of them to ensure your sales and profits provide the cash you need to run your business. 

Chapter 4

Getting business planning done

As we’ve seen, after its initial creation your business plan requires constant revision. Set aside a couple of hours at least every month to check the ongoing relevance of your business plan.

Update your plan in line with your findings. And be brutally honest – it’s astonishing how many business owners are so emotionally attached to their businesses that they will lie to themselves – and that’s why the real numbers are crucial.

Hence, most importantly, get the data. KPIs are the source material for gauging the health of your business. Has a marketing campaign worked? Can you pay suppliers next month? Are you converting leads into sales? Your KPIs will tell you, and give you the information you need to act.

They won’t necessarily tell a positive story. But if your Pay Per Click advertising is drawing plenty of traffic to your website, yet few of those visitors are converting, it’s better to know as soon as possible.

Here’s what to investigate regularly. Include key personnel in discussions, and use digital tools to mine the data you need:

Sales, profit, cash flow

Check these fundamental KPIs every couple of weeks at least. Ask your accountant for regular reports, highlighting trends, or run your own reports from an accounting software package like Xero. Compare KPIs to your budgeting forecasts. 


Is it competitive? Are there opportunities to reduce prices and encourage loyalty or additional sales? If suppliers have hiked prices, will your customers absorb the change, or is there a way to bundle it with other benefits? Talk to your sales manager if you have one. 


What have been your most successful sales channels over the last month? Which marketing efforts have shown the greatest payoff? Which have disappointed? If you have it, use CRM software (Salesforce, for example) to match marketing efforts to results.


Some costs are fixed, at least in the short term, but others can fluctuate widely during a month and, if unchecked, can seriously affect cash flow. One of those is employee expenses. Use an expense management platform like Soldo, connected to prepaid corporate cards, to let staff spend company funds within predefined limits, while giving you a real time view of expense spending.


Keep abreast of employee costs, retention rates and, if possible, staff satisfaction rates. All these metrics can have a huge impact on the success of small businesses. Replacing key staff is expensive and disruptive. Plus – and few companies talk about this – small businesses are disproportionately affected by staff turnover. After all, losing a key person in a 5-man company is 20% of the workforce!

Should you hire an accountant for budgeting and planning?

Many new businesses think they can do without an accountant altogether, and get by with software. While that might be true for the basics of budgeting and bookkeeping, it ignores another role accountants play: that of an independent advisor.

According to Laurence Collins, managing director of SME specialists Magic Accounts, having an external, independent accountant on board means that SME owners are given an impartial view of their business. 

Accountants can offer neutral, balanced advice about the running of the business and the day-to-day management of finances, informing your business planning sessions.

Get an accountant to help you visualise and interpret your KPIs as soon as practicable.

Chapter 5

Putting business planning to work

Business planning, budgeting and tracking KPIs are only of use if you put findings into action. 

Often, conclusions and associated actions are obvious. For example:

Start automating payment requests and reminders (most accounting software will do this for you). Make personal contact with persistent offenders and start looking for replacements. Invoice financing can ease cash flow concerns in the short term as a last resort.

If potential customers are showing interest in your product and service through website visits, email enquiries and calls to your sales team, but most are failing to convert, look closely at where drop offs occur. It may be anything from a poorly designed website (easy to fix) or pricing that doesn’t meet expectations (much harder to put right!).

If your cash flow forecast shows a shortfall in an upcoming month due to an annual seasonal sales slump or one-off capital expense, take measures to reduce the impact. These might include a promotion to encourage extra sales, the temporary imposition of stricter limits on expenses spending, or a bridging loan to cover the lean period.

But sometimes, the issues you uncover by tracking KPIs will be more fundamental, requiring wholesale change. Perhaps the assumptions in your business plan were too optimistic, or a new competitor has emerged who competes on price alone, squeezing the market. Analyse your KPIs to identify where your pain points are, and be prepared to make sweeping changes to your business plan. 

That might mean targeting a different part of the market (where quality trumps price alone, perhaps?), focusing on customer satisfaction and investing to that end, or even slashing overheads by cutting staff, using more contractors or encouraging remote working. 

Whatever it might be, fundamental changes to your business plan or budgeting require a collaborative approach. Be honest with your team, tell them where problems lie and invite their ideas. Get buy-in for new processes, technologies or ways of working that any changes might require. As a leader, making painful decisions is sometimes inevitable, but communicating them effectively and implementing them sensitively will aid acceptance.

When you make fundamental changes, update your business plan and focus even more keenly on your core KPIs. Check them weekly to make sure your decisions or paying off where it counts: in the health of your business.

Soldo is a powerful expense management solution that combines prepaid company credit cards for small business with a smart, intuitive app and admin tools. It allows you to budget more effectively. Learn more about prepaid business cards here.