The end of the year is a time for reflection and for looking ahead. And when you run a business, it’s time for reflection and for looking ahead – on paper. That’s right, budget time!
Most people would agree that a budget is a wonderful financial tool. A budget provides you with an outline of your projected revenues and expenses for the coming year, and gives you a rather simple and efficient tool for evaluating and monitoring your performance. But how many small businesses actually do budgets Unfortunately, not very many.
But the truth is, a budget, or the lack of a budget, can make or break a business. Candy Beauchamp, owner of Offassist, a virtual assistance company I use for my bookkeeping services, seesthe positive results of budgeting firsthand in dealing with her small-business clients. “If you are a growing business and don’t have a budget, you really can set yourself up for failure,” she said. “Entrepreneurs are extraordinarily busy – I have yet to meet one that isn’t being crushed by deadlines, customer needs, vendor requirements and the 300 other things that are screaming for their attention. But, as hard as it is, take the time to make your budget. You will be able to see, on a monthly and a year-to-date basis, where your business is – but more importantly, how it is stacking up to your expectations.”
For one of my clients, Chicago-based Orbit Media Studios, capturing this financial picture on paper is what moved them from the scenario of “barely making payroll” to “making a profit,” said Frank Voznak, principal and creative director of the Web design firm. Once the company started doing budgets two years ago, they were able to identify the culprit behind their lack of profitability – equipment and software purchases.
“The biggest thing that changed for us as a result of doing budgets is how we handle expenses,” Voznak said. “Now that we have a handle on our expenses, we are going to take a closer look at the revenue side.”
Voznak said although he has no formal accounting training, he views budgeting as a task that requires nothing more than common sense and a little time. “I handle the finances of our company just like I handle my personal finances. It’s very simple. Don’t spend money you don’t have and try to operate without debt.”
My job as a small-business advisor is usually to advise businesses, but in this case I’m issuing an order – make your budgets for next year! I don’t know of a single business owner who consistently meets their growth and profit targets without one. So, do it now! Here’s how you can get started.
- First of all, if you need some formatting ideas, Beauchamp recommends going to the Microsoft site for good budget templates. These templates will give you a solid basis for starting the budget process and even give you an idea of the information you will need.
- Create a sales forecast. How much are you going to sell next year? Some business owners pull a number from the air and decide, “20 percent growth!” Though many business owners have good intuition on these issues and their business, owners should have concrete evidence to support their estimated growth. Start with your current customers and project what can you expect from them for next year. Then, evaluate your sales pipeline. Do you have deals you expect to close that will feed into next year? Lastly, look at your sales performance. Determine how many new projects you close on a quarterly basis. Then use that information to forecast new sales for next year and be sure to include projected growth. I usually use a spreadsheet to accomplish these tasks so I can make necessary changes throughout the process and during the year. And format this information to suit your needs, whether monthly, quarterly or yearly.
- Now, before you move forward and look at expenses, evaluate your manpower. If you are in a service business, growing your top line means hiring new people. You can forecast new hires by looking at each project and estimating the required staffing, or you can look historically at what your sales per employee have been and divide your new sales by that number to get the additional employees you will need. All businesses also need to look at attrition and possible staffing changes that may occur throughout the year. Growing businesses often need to create new positions to maintain their performance and keep up with the growth.
- Next, forecast your expenses. How much are you going to spend next year (i.e., equipment, supplies, wages)? Start with your Quickbooks file from this year. You can export a YTD Income Statement and set the columns by month. This provides you with how much your business spent in each category for each month of the year. Evaluate the list and mark those items that tend to vary with sales (i.e., payroll, marketing, etc.) and those that are fixed (i.e., rent, electricity, etc.). I usually then create a formula that will increase my expenses in the variable expense categories proportional to my projected sales increase. And remember Orbit Media Studios, this report may unlock some useful information to saving money and increasing your business’ profit.
- Think about any known changes that will materially affect your results (i.e., conferences or trips, capital purchases, etc.). Consider the financial impact of these events and be sure to include them. You also may want to consider the validity of certain items and their impact on your growth as opposed to their cost. Depending on your business’ performance, it may be necessary to reduce spending on conferences or other costs during certain time periods.
- With your sales and expense forecast in hand, as well as other pertinent information, you can subtract the projected expenses from the projected sales. This will provide you with a good, quantitative estimate of your upcoming year’s profit. And, if you don’t like the resulting figure, go back and reevaluate your budget. Look for items or areas where cuts can be made or ways to improve sales. Remember, it’s your business and your budget.
- View your budget as a continuous process. Throughout the year, set definitive times for reviewing your budget and making any necessary additions or revisions. Things change during the course of a year, and you cannot always plan for everything. This also provides you with an excellent opportunity to review your business’ performance and proceed accordingly.
Beauchamp estimates that compiling a budget can take as little as an hour – that is, if the business owner is organized and has current financial records and a good accounting program. But, even without those factors, a budget usually can be done within a few hours depending on how detailed the business owner wants the budget to be, she said.
Regardless of the time it takes to do a budget, it is time well spent and may prove to be some of the most profitable and valuable time you spend on your business. With a budget in hand you will be well armed to adjust your business to the ups and downs that next year may bring. You can proactively make choices about how you will operate to insure that you make the profit and growth that you are looking for. The success of your business comes down to numbers – and without a budget, your business may be missing the boat.
Photo credit: _foam