Does My Small Business Need a Budget?
“I only have a small business, I don’t need a budget.”
“I don’t have enough money to budget.”
For many small business owners, the word “budget” is something for the bigger company – maybe they’ll have one when their business “grows up.”
What is a Budget?
The simple explanation is a budget is a plan for how you will manage all financial resources and all expenses for your business. The basic equation that you want to demonstrate in a budget is as follows:
(estimated )Sales minus (estimated) Expenses = Profit (or loss)
How to create a Budget
If this is your first time to work on a budget for your small business, you might work from the perspective of having to list cost of goods or services plus all of your operating expenses to start the process.
How much does it take to operate your phone line? What is the cost of other utilities? How about the cost of a company vehicle, or what is the cost of transportation if you’re using your personal vehicle to also serve as a company vehicle. Do you need any supplies or inventory to operate your business? How about any employee payroll, payroll taxes or independent product or service providers? Remember to include everything you spend money on to operate your business even if you allocate some of the expenses to “petty cash” expenses, such as parking or bridge tolls while traveling to see clients.
I recommend that you create annual budget, as opposed to a monthly budget, so you can identify any expenses that you may have that come up only once or twice a year such as insurance and include them in your list of expenses. This allows you to amortize or spread the cost of this out over several months so that you can plan ahead for the expense.
As you work on your list of expenses keep in mind that these are the expenses that are necessary to operate your business. These should not be your “wish list” unless you want to budget in some expansion or growth. You may want to create a budget with just the necessities and another version of your budget with expansion expenses listed so that you can see the cost of both separately.
With a dollar figure to work with of your total expenses you are able to set the standard for or evaluate your sales figures. If you are new to your business you may need to use the dollar amount of your expenses to help you determine what your sales need to be in order to cover all costs and show a profit. If you have been in business for a while you can evaluate whether or not you are producing a profit by looking at historical sales figures.
As you conduct business during your budget year you should compare your actual income and spending with what you estimated. This will allow you to manage your spending so that you don’t over spend and cut into or eliminate your profits. You will also be able to see if sales have met expectations in order to cover expenses and still remain profitable.
Who should Budget?
Every small business owner should budget, no matter the size of business. I have heard some small business owners say their business is too small to budget, but that is not true. If you don’t have a written plan for what your financial obligations are and how your revenue will cover those obligations and leave some money unspent, then your business will never grow. In fact, you may out-spend your revenue and put yourself out of business.
Why Budget?
Budgeting for your small business gives you control over your finances. By looking ahead to what you know or can reasonably estimate what your expenses will be, you can then make financial decisions that will keep you from over-spending, or give you the freedom to invest in the growth of your business.
When Budget?
Every small business owner should have a budget to start their business and then review it annually. I recommend that small business owners review their budget several months before the end of their fiscal year. When I say review the budget I’m talking about comparing projected budget with actual. In the comparison you can see if your estimates were realistic. You and your CPA can also plan for last minute tax strategies, or plan to implement strategies in the up coming year’s budget.
The Goal in Budgeting
Remember, the goal of having a budget is to stay in control of your finances in advance. Setting the standard for your spending and revenue and having a tool to compare with actual will give you the control that you need to stay profitable. At the very least it will give you an indication of whether or not your business is actually profitable and not just busy.
Copyright 2005 Melody Campbell