As a small business owner, I know (and my bank advised me) I need a budget. I’m overwhelmed and don’t know how to begin. What do I need to do to create a successful budget for my business?
Confused about budgeting basics in Phoenix.
It’s certainly best practice to create and follow a budget for your small business. Getting started is simple, if you understand the basic concepts behind budgeting.
Effective small business budgets capture and reflect the costs necessary to meet a company’s goals. It’s a matter of tracking what comes in and what goes out. To understand the costs of running your business, start with what you spent in the past and the relationship to the revenues of the company.
Revenues are impacted by more than simply increasing product sales. Revenue may be affected by customer retention, entering new markets, changes in your pricing structure and the additional costs required to implement these changes and keep up with growth. Also consider additional capital needed in the current year to improve revenues or cut costs in the future.
5 Steps to Your Small Business Budget
Step 1: Set company goals for the short term and the long term.
What are you short and long-term goals? Include revenue, profits, new products and any additional goals. Goals should be achievable and have a solid rationale. Create action plans to support each goal and clearly outline why & how it will work. Make sure EVERYONE involved in the budgeting process has a clear understanding of the goals. This will allow the team to thoroughly analyze the costs and revenues that fall under their responsibility and permit you to hold them accountable for performance.
As you strategize your growth plan, ask:
- What steps are required to achieve my revenue objectives?
- How much marketing do I need?
- Will I need more sales people?
- How will my sales team find customers?
- How much of my new product will I reasonably sell?
- What will be the commission structure?
- Do I need new, more or different equipment?
- If I plan to be the most efficient producer in the industry in five years, what needs to be included in the budget this year to keep me on track?
- Are there any constraints that impede the performance I am budgeting for? (This can include production capacity, internal staffing, etc.)
Step 2: Analyze the costs associated with the goals you’ve achieved successfully in the past.
Some questions you might ask:
- How many customers did I have and what was their average purchase?
- Will that customer number go up or down?
- What were the costs associated with making and selling those products? Will anything change?
- Will my material costs be the same or could I negotiate better prices with more volume?
- Are any changes in my costs of labor expected?
- Are any other costs going to change such as utilities, rent, or security?
- How many people did I need to make my revenue goals and are they still available?
Do not simply add 10% to last year’s actual numbers. Look carefully at each cost and analyze the effect for each change in revenue. Identify variances from previous projected budgets or factors neglected or changed.
Examples of questions to identify where change is needed or anticipated:
- Did the marketing department check trade show spending against the benefits gained and decide not to attend the show this year?
- Were several jobs in the company streamlined and as a result not require as many people to grow?
- Did team leaders review the cost of additional investments in people and add training plans?
- Did you find the same quality raw material from another source at a lower price?
Step 3: Determine any relationships or factors that could influence your budget plan.
Analyze and be aware of the link between revenues, costs and their drivers, ensuring all related costs change with new assumptions. Drivers of cost and revenue can influence other factors also.
Look for relationships such as:
- An increase in the number of team members drives the square feet for office space, so will you need to rent more space? What about equipment (computers, desks etc.)?
- Will there be additional costs associated with acquiring a new piece of equipment, such as re-organizing the shop floor?
- Are you expecting a significant change in how much business a customer will give you and are you prepared to staff that operation?
- What is your capacity, and do you need adjust staffing, equipment, service, etc?
- Did you consider travel and entertainment costs to land the new customer?
Costs can vary directly in relation revenue (these are known as variable costs). For example, to sell one additional ice cream cone you need one more cone and one more scoop of ice cream. Other costs do not change as directly with revenue (these are known as fixed costs). The server you hired to work in your shop will be there whether you sell one more cone or 50 more cones.
Step 4: Quantify and consider new costs, savings and revenue increases.
Incorporate the revenues and costs into a budget, making sure to recognize the relationship of the cost to the revenue projected. For example, if you project an increase in revenue of 3%, make sure to adjust the costs associated with obtaining that revenue increase.
Step 5: Look at past performance to see if any budget changes need to be made.
Compare the budgeted amounts to actual past performance and be sure the person who prepared the budget can explain every change, both in context of previous years’ performance (ex. Depreciation increased due to the acquisition of a new machine at the end of last year) and the current forecast (ex. sales commissions increased $xx because of a new commission structure and also new sales goals of $xx). If you have agreed to any compensation tied to “beating” the budget, be aware of sandbagging. (Putting in numbers that are too easy to meet).
These steps will give you a basic budget. Don’t forget to consider any additional cash you might need to invest in creating future growth.
Budgeting is not a once-a-year job. Throughout the year, analyze your actual revenues and costs against budget. Explain any differences and see if you can course correct by continuing to find better ways to do things. Your goal is to beat the budget by coming in under projected expenses and/or generating more revenue than you thought you would!
Budgeting basics are similar whether in Phoenix or your neck of the woods. If you need assistance with your budget, enlist the help of a vetted bookkeeper. Set your small business up for future success with a strong budget!