In honor of small business Saturday last weekend, we are dedicating this blog post to other small business friends! As a small business – there are just the two of us after all – we totally understand wearing all the hats. And that includes the financial one. How to get started:
Step 1: Understand why you need a budget. The basics of a budget can tell you how much money you have, how much you need to bring in, and how much you need to spend.
“Budgets can also help you minimize risk to your business. A budget should be created before you sign a new lease or invest in new machinery or equipment. It’s better to find out that you can’t afford new office space before you commit to spending a certain amount of money every month. According to the U.S. Small Business Administration, a budget can be used to indicate some of the following:
• The funds needed for labor and/or materials.
• For a new business, total start-up costs.
• Your costs of operations.
• The revenues necessary to support the business.
• A realistic estimate of expected profits.
You can use this information to adjust your plans or expectations going forward. A 12-month budget can be updated with actual expenditures and revenues each month so that you know you’re on target. If you’re missing the targets set out in your budget, you can use the budget to troubleshoot by figuring out how you can reduce expenses like labor or new computers, increase sales by more aggressive marketing, or lowering your profit expectations” (Inc. Magazine).
Step 2: Answer these 3 questions:
• What is your estimated income and where does it come from? This could be from your hourly rate, sales, savings, investments, etc. Always start with your profits as this will steer the rest of your budgets estimates.
• What are your fixed costs? Rent, salaries, legal services, insurance?
• What are your variable expenses? Take into account emergency funds or one-time expenditures – like the loss of a client or replacing equipment.
Fun fact: You have just created a profit and loss statement.
Step 3: Put it all together. Here are our recommended resources from Inc.:
Microsoft offers a series of free downloadable budget templates. These include a rolling budget for small business, an expense budget, a website budget tool, and an annual operating budget for a services business.
BetterBudgeting offers a free budgeting worksheet.
Docstoc is a marketplace that lets you find and share professional documents. The website has an assortment of free printable budget worksheets to try.
Winsmark Business Solutions has a free downloadable cash flow budget worksheet.
Business Owners Idea Café has an all-in-one first-year business budget calculator that lets you plug in your startup, monthly, and personal expenses in your first year in business.
You can find more tips on making your small business budget work for you here.
Let’s imagine that your annual sales for this year were $100,000, up from $75,000 on the previous year. A 33.33% increase in annual sales sounds great but you need to gather more details behind those numbers.
Here is an example:
|Gross Revenue||$75,000||Gross Revenue||$100,000|
|Total Expenses||$33,750||Total Expenses||$55,000|
|Net Profit||$41,250||Net Profit||$45,000|
When accounting for the total expenses behind those sales, the impressive 33.33% increase in gross revenue is watered down to just a 9.09% increase in net profit before applicable taxes. One potential culprit behind this lower than expected profit margin could be an inefficient management of resources. In 2016, your total expenses were 55% of total sales, up from 45% in 2015.
From this simple scenario, you can draw several useful business management questions:
- How does a 33.33% increase in annual sales compare to the performance of your direct competitors? Your industry?
- Did you expect the additional 10% increase in costs as a percentage of sales to generate the extra $25,000?
- Was there an event, such as a layoff, supplier problem, or machine breakdown, that caused you to incur additional expenses?
- What are ways that you can cut down on expenses to meet additional customer demand?
- Would upgrading a piece of machinery allow you to drive down production costs? If so, would you be able to qualify for business financing for the new machine?
- If you profit margin continues to increase at an annual rate of 9.09%, could you continue to cover your total expenses for the next 5 years? Think about details such as the terms of your rental agreement or labor needs throughout peak seasons.
This is why it’s important to have a business budget. It allows you to review your performance in a very objective manner, highlights business decisions that require your attention, and forces you to start thinking about the future of your business.
Let’s get started!