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Work & Finance Home >
Money Matters
Preparing a Budget
Ok, you say, I know I need a
budget, but how do I prepare one? The most common budget period
is one year, but this can vary depending on whether or not your
business has seasonal or cyclical fluctuations. For example if
you run a Christmas decorations shop, or a costume shop your
business is going to peak during certain times of the year.The budgeting process usually begins with the collection of
accounting data. In order to prepare a strong and achievable
budget, you must analyze each item of income and expense from
the prior year. If your accounting system is a mess and the
figures are inaccurate, the numbers used in your budget will be
useless. This is why it is so important to keep good records.
Quicken and Quickbooks are excellent programs to help you with
setting up an accounting system that is easy to use and
understand.
If you can review your prior year’s figures with confidence,
try to cultivate your strong areas and look for ways to increase
performance or volume. For example, if one particular product
sold well, take a closer look at that product. What you did to
market it, etc. and try to model your other products in the same
vein to accomplish the same results.
You also need to analyze your weak spots. If possible, set up
some type of internal control over the weak areas. A cost
analysis will help you determine if you are actually making
money on the sale of a certain product. This is a big problem
with new business owners. They don’t do the research or due
diligence in determining the need for their product. In effect,
they spend a great deal of time and money with a product that is
never even going to break even. You cannot get emotionally tied
to your product. If it is not selling, let it go and move on to
what is selling.
If your business is in its first year, your budget will involve
a little more homework. Keep in mind that a budget is an
expression of your goals. Try to determine the number of
billable hours you might reasonably expect to charge for within
a year’s time. If you are in sales, try to establish the
number of items you will be able to sell. After determining the
revenue portion, you should look to your expenses.
Some expenses, like rent, will be fixed because they do not
change from month to month. For example, if your office space
rent is $3,000 per month, you must still pay $3,000 per month,
regardless of whether or not you have made any sales or earned
any income. This is why working out of a home office, if you
can, is so much better. You can substantially cut your rental
costs down.
Another type of expense is a variable one. In budgeting, this is
known as a variable “cost,” which is a cost that increases
with the level of sales or income. They are variable because the
more income you generate, the greater the costs you will incur
(this just means the more you sell, you more you have to buy).
If you have others working for you, sales commissions are an
example of a variable expense—the greater the sales revenue,
the greater the sales commissions.
You need to be sure to do research before starting your business
to determine what comprises your fixed and variable costs.
Certain types of businesses have an established profit margin.
This information may be available by simply asking other
professionals in your field. Your accountant sees thousands of
tax returns and may be able to give you an idea of the average
“cost of sales” or “profit margins” for your type of
business. The averages for certain industries are also compiled
by financial ratings organizations such as Dun & Bradstreet,
Moody’s and Standard & Poor’s. For example, if you are
starting a coffeehouse, you could compare your sales, gross
profit ratio, and net income to the averages for the retail
sales/coffee industry compiled by Dun & Bradstreet.
It’s amazing how many home based and small-business owners
don’t know if they’re making a profit on service, parts or
sales. Others don’t know whether they’re making or losing
money on a particular job. The purpose of the accounting and
budgetary process is to help you answer these questions and make
the right management decisions. You can’t plug the leaks in
your revenue ship if you don’t know where the holes are.
Again, using a program like Quickbooks allows you to see where
time is spent for a particular project, what your costs are, how
many employees were needed to complete the project and the time
it took them (which gives you an idea of salary differential for
certain projects).
If for example you are running a consulting business, Quickbooks
allows you to track the number of hours you work on a project
and what your costs are. In most consulting businesses your time
is your valuable commodity. You need to be compensated for the
time you spend on a particular project or with a client.
Copyright 2003 DeFiore Enterprises
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