The importance of having a budget for your China business - Part 1
Entering the China market and doing business in the region is an
important decision for any company, regardless of their size. After
this exciting first step, many variables will come to play affecting the
future and viability of your business. But there is one simple thing
companies can do to make sure they stand on solid ground:
create a budget.
Knowing how much money you will need in order to run and operate your business successfully is one of the fundamental elements that will ensure your survival in the highly competitive Chinese markets. It is essential to understand where your money is going and how to maximize your resources.
Budgeting in China is specific to each industry and sector, but there are a few general points applicable to most companies. Once you start operating in China, it is important to look at your actual financial figures and match them with your budget.
Many business owners or sales managers without a financial background feel overwhelmed by the idea of creating a budget or may feel that it represents a constraint that doesn’t give them any flexibility. Similarly, they may feel that a budget “depresses” them because it shows that they are not reaching their goals.
A budget is supposed to act as a guide, and all emotions should be left aside. It is an important tool to keep you and your operations in China under control. As the old saying goes: if you can’t measure it, you can’t manage it.
Understanding where the real successes and failures are will allow you to properly manage your business and develop an appropriate strategy to improve things when needed. Having a budget on paper will permit you to see more clearly what you have done right and what went wrong.
The creation of your budget should always be coordinated with the finances of your company and correlated to your business activities. The person responsible for the finances should coordinate all the various steps that are involved in every transaction that the company is doing. A budget will give you the ability to plan ahead.
Having a budget is particularly important during the first year of operations in China. The budget will help you identify your registered capital in China. When you incorporate a limited liability company you are required to define a Registered Capital amount, which is your working capital. These are the funds that you will be transferring over to build up your business and pay for all your initial expenses, such as rent, salaries, products, and other things.
In the past, the Chinese government had allocated minimum capital requirements. A lot of companies, especially those that felt budgeting was too overwhelming, would just designate the minimum amount without calculating how much they really needed. Luckily, that has changed.
The benefit of having to appoint or define a registered capital amount is that you have to create a budget to understand how much money you will need in China to build up your business. This forces companies to create budgets to see what their expenses are going to be and what type of revenue levels they're going to achieve within their first year of operation.
Establishing a budget will help you focus on your general and overall investment goals. In the case of a start-up company looking for new investors, they will want to know how much money the company needs to operate in the Chinese market, and for those companies already established in the country, they will have to determine how much they will ask from investors to run the business successfully.
By creating a budget and controlling that budget, a company can see how much it is actually spending. This will help you focus on your investment goals and report back to your investors about how much money you are utilizing and whether you need more.
Business moves fast in China and it may feel tempting to jump at an opportunity without the proper planning. But if success is what you are after, knowing where your money is going, is key. Overspending is the main problem that companies face in the first few years of operation.
For every opportunity you come across, there will be a trade off. You cannot say yes to everything that crosses your path, even when it seems to be promising. A budget will allow you to prioritize and evaluate what is more important and urgent, where you should spend your money first and what other things can wait.
This will help you stay organized. You will be able to decide how to spend your money, how to control your spending and how to make your money work best for your business. It doesn’t mean that your budget can’t be flexible, but it will keep your company’s goals on track.
In China, many obstacles may get in the way of your business plan and you will need money to overcome them. There are always going to be unexpected costs, for that reason your budget should have a line item for unforeseen circumstances.
It is difficult to anticipate when and what could come up, but it is wise to be prepared. An example could be that your company needs to terminate someone’s employment that isn’t needed for your operation. Now, you have to pay a termination compensation, but you weren't expecting in your first year and you didn’t plan for that cost. Preparing for unexpected expenses within your budget will help you stay on track.
Developing a good communication system with the finance department is fundamental. From the owner of the company, to the CEO, general manager and even sales manager, everyone should make a proactive effort to communicate with the finance team and understand money and budgetary issues.
Keeping a budget will give you early signs of something that is not going as expected and enough time to correct it. It will also help you determine your debts, especially during the company’s first year, when it is most common to have them.
But a budget cannot go anywhere without a business plan; they go hand-in-hand. Obviously, this is even more daunting for a lot of start-ups in China. A business plan will guide your operations and support your general marketing strategy in a highly competitive market; it will as well determine your overall objectives and goals without looking at the numbers.
There are a lot of different economic circumstances that might cause your business to have issues along the way. That is why your company should update the business plan together with the budget on a regular basis. A quarterly review is recommended in order to keep you on track and help you report to investors and back to headquarters on what is actually occurring in the market.
Some enterprises design sophisticated business plans and budgets, but soon forget them in a drawer until the following year. What’s the point of having done this in the first place if you are not going to look at them on a regular basis? Budgeting and business planning can only be effective if it is an ongoing process.
If you want to achieve your goals in China, it is fundamental to pay attention to your guidebook. Your budget looks at the numbers and tells you how much money you will need to achieve those goals.
In the fast-moving Chinese markets, things tend to change quickly. By making your budget an ongoing process, you will be able to maintain a certain flexibility that will allow you to act swiftly when necessary and adapt to unexpected circumstances.
However, don’t rush. You cannot throw numbers together in a couple of hours. Take your time and seek the help of those who can offer guidance. Don’t pretend to know everything and look for professionals inside or outside the organization with enough experience to create a budget.
The fiscal year in China is the calendar year, from January to December. At a minimum, you should start to budget for your business in October, that way you will have three months to work on it and be able to use the financial information from the three previous quarters.
A budget is a flexible document that is supposed to guide you. If you have it finalized by January 1, you will be able to start the year with a clear view of the months ahead.
Should you have questions about your China budget or need some form of validation, complete the below inquiry form with your questions and comments.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.