By the numbers: Budgeting for the small business
Budgeting is a task that most small business owners fail to achieve. It really is not that difficult and the benefits that you can receive are well worth the effort. Let's start with asking ourselves, What is a budget? Why create a budget?
A budget is a forecast of all cash income and expenses you estimate your business will have for a period of time. Usually a budget covers 12 months. You can also break down your working budget by the month to make it a more effective tool. You then can compare your budget to your actual expenses and determine whether your expectations were fulfilled.
Planning is the most important reason to create a budget. By using this very effective tool, you can estimate future needs, plan profits, spending and your overall cash flow.
Many small business owners are not sure how to begin creating or using a budget. The small business owner knows his business when it comes to the services they provide or products they distribute. Unfortunately, when it comes to the budgeting process, they feel they are not equipped to complete the task. It actually depends on the level of expertise the owners have regarding their services that determine the estimates that directly relate to the budget.
For example, an owner will know which products sell better than others, prices and quantities for services that will be rendered, and what their expectations for the near future may be. If you take this information and estimate what income you think you will generate and how much it will cost you to perform the services, basically that is budgeting. The word budget brings terror to many small business owners, and as a result they do not use this very valuable tool.
The main elements of a budget include sales revenue, total cost of sales, profit, and administrative costs. The main difference between cost of sales and administrative costs is this: cost of sales is any cost directly related to making the sale, administrative costs are general area costs such as building rent, utilities, and office supplies. You will have these costs whether you make a sale or not.
They costs are usually easier to estimate during the budgeting process because they are usually the same from month to month. They can be divided by 12 to arrive at the monthly cost.
During the beginning of the budgeting process three questions should be answered:
1. How much net profit do you want the business to generate during the year?
2. How much will it cost to produce that profit?
3. How much sales revenue is necessary to support both profit and costs?
While answering these questions, the safest way to estimate when budgeting is to overestimate expenses and underestimate sales revenue. This conservative approach will give the small business owner a safety net to make the budget more attainable.
When you begin the budget process, start with a forecast of sales, determine how much it will cost to make those sales and then deduct your fixed or administrative costs to arrive at your net profit for the period. This may seem like an oversimplification of the process, but if you break down the budgeting process in these steps it doesn’t seem like such an unattainable task.
Other resources are also available to small business owners such as:
SCORE: Service Corps of Retired Executives, which is a national organization sponsored by the SBA. They will walk you through the budgeting process and assist you in monitoring your progress throughout the period. This service is free of charge. Schedule your appointment by contacting your local Chamber office or by visiting www.SCORE.org.
SBDC: Small Business Development Center, which is a also sponsored by the SBA in partnership with state and local governments.
It is always a wise decision to add an accountant or CPA to your team. They can assist in the preparation and monitoring of you annual budget to increase your profitability and ultimately your success.
Colleen Cain | 05/14/2013