Many of us use budgeting as a management tool for dealing with the future. Some of us see budgeting as a distraction from living in the moment. Thoughtful budgeting does result from thoughtful discussions and helps turn expectations into reality. When businesses don’t prepare an annual budget and wonder why reality doesn’t meet their expectations, it may be time to take a second look at the benefits of small business budgeting.
During the start of every year a review of budgets and budgeting helps focus your business effort. During a recent networking event I spoke with a finance officer at a local company and he expressed his dismay that more businesses did not embrace the budgeting process. For our purposes let’s go over some basic small business budgeting principles.
# 1. Gather and sort your data
First, let’s gather some basic data by looking over your checking and savings account. Add up all your fixed and variable costs. What are these you ask? Well, similar to your household expenses your business has regular recurring expenses like insurance, rent, taxes on property, wages paid to salaried employees, depreciation of equipment, interest on borrowed money, building maintenance costs, office salaries, and office expenses.
Your variable expenses might vary with sales. In some businesses, the cost of labor is the biggest factor. Sales commissions, payroll taxes, insurance, advertising, and delivery expenses are other examples of variable expenses. Sort these by month and total them for the year into a number of different buckets.
# 2. Why did you spend what you did?
Let’s now look at why you spent money in each of those buckets. For instance, do you have a lease agreement for your rent; do you have loan agreements for borrowed money? Did you need to hire a plumber to fix that clogged toilet? What type of depreciation schedule did your accountant develop for your equipment?
# 3. How filled will your buckets get?
Now that you have a good sense of why each bucket is there, count up what you know will be your fixed expenses, by month, for the upcoming year.
- Plan it out on a simple spreadsheet and add the monthly and annual expense totals up.
- Let’s look at your variable expenses. Assuming you understand why you put variable expenses in other buckets ask yourself – will I need to spend money this year in those areas as well, and, how much?
- If there are variable expenses you think you will need to make, create a bucket for those as well.
- Once you answer these questions put the numbers on that spreadsheet and add up as you did with the fixed expenses.
# 4. What do you need to sell?
We have looked at one part of the budget. Now, let’s look at the other side. How much do you need to sell in order to cover your expenses, make a profit, AND grow your business?
- You can start either with a forecast of sales and work down, or with a forecast of profits and work up. Most businesses use the latter method. In other words, you decide what profit you want to make and then list the expenses that you will incur in order to make that predetermined profit.
- Since we are developing a monthly and annual budget, you will need to prepare a monthly and an annual forecast.
- Look at your various products or services and assess realistically how much of each you want to sell and with what pricing strategies.
# 5. Does it all add up?
Now, compare your monthly and annual sales or profits forecast total to your monthly and annual expense forecast. Hopefully your sales and profits forecast are greater than your forecast expenses. Are your product or service markups high enough, realistic enough?
Before using your budget as a plan for increased profit, make sure your projected year-end profit is large enough to make a return on your investment and a return on your own work-pay.
A good small business budget can help focus performance efforts for the business owner and staff. Properly used it can be a good planning tool to growing your business. Make it habit to budget – you’ll be glad you did.
Image: “a small black calculator on a pile of dollar bills/Shutterstock“