Making Small Business Budgets
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December 13, 2007
Most companies choose a December 31st year-end in keeping with the calendar. This would mean that a twelve month budget would span from January 1st to December 31st. If you've never prepared a budget then you may think why do I need a budget for my small business or home based business? The answer is simple - if you don't have a budget then how can you control your spending? How can you evaluate where your money was spent and how effective your expenditures are?
Once you've realized how essential a budget is to a successful company then the next step is to go through the long process of preparing a budget. Yes, making a budget is time-consuming and there are no shortcuts. But, by spending time now you'll save yourself a lot of aggrevation in the future as well possibly save large sums of money.
Another year is almost at an end and it's time to set budgets for business owners. As a basis, start with last year's budget, that is, if you have one. If you have a new venture or simply did not prepare a budget last year then it will be more challenging with coming out with a budget for the next year.
One of the keys to running a successful business is planning. You may have a fabulous product and sales may be skyrocketing, yet you may be finding that there's just not enough money in the bank account. The reason for this may be poor budgeting. While your revenues have been skyrocketing your expenses may have been outpacing revenue. A classic example is boosting advertising expenditures three-fold at Christmas time and then hoping for triple the sales level. This may not happen. In practice there may not be a positive one-to-one correlation between advertising expense and revenues. It is by budgeting for revenues and expenses that you can control your expenditures and compare actual expenses to the budgeted figures to determine how successful your spending has been.
The steps to preparing a budget are:
1) In preparing a budget start with your revenues. Do your best to predict what the gross sales will be. This can be very difficult or near impossible if you're starting a brand new venture and have never had any sales.
2) Calculate the direct costs of sales. For instance, if you're selling a book then the revenue would be the retail price of the book. The direct cost would be the price you pay to your supplier for the book.
3) Subtrace the total direct costs from your total gross sales. This will give you what is known as the gross profit margin. The gross profit margin represents your profit before indirect expenses have been covered. The gross profit basically represents the amount that you have available to cover all other costs plus keep any left over amount as income for yourself. The gross profit better be a positive figure, otherwise you're selling your products for less than they cost you. If you're preparing your budget and in step 4 find that your total indirect expenses exceeds your gross profit then you'll know that you expect to make a loss for the year.
4) The fourth step is to budget for all your indirect costs such as administrative overhead, marketing budget, salaries & wages, etc. These indirect costs include both fixed and variable costs. For instance, rent may be a fixed cost whereas advertising are variable costs.
5) The next step is to calculate your expected net income. Net income is equal to the gross profit from step 3 less the total indirect expenses from step 4. The net income will represent your anticipated earnings. If the net income is negative then it means that you anticipate a loss for the year.
After you prepare an annual budget then follow the same steps above to prepare monthly budgets. At the end of each month compare the actual results to budgeted and take any appropriate actions. You may find that you have revise monthly and annual budgets. Budgets are dynamic in nature and should be flexible. They are merely a guide for planning and controlling costs. Budgets also help you sit down and concretely predict revenues and plan for where you'd like to see your sales a year from now.