Many small businesses do a great job of managing their books, but skip the part of creating a budget. Budgets give you a guideline for expenses and income, and enable you to compare your financial goals with actuals.
The Ingredients. There’s no right or wrong to creating a budget for your business. As the business owner or CEO, you may create your budget alone or use a team approach. The important thing is to be comprehensive; include all the expenses your business incurs such as rent, utilities, payroll and the cost-of-goods sold.
The Process. There are a lot of ways to create your budget. Some people like to have a total dollar figure in mind based on last year’s numbers, and then back into it. Some like to start with the details, but to me, that is a cumbersome task that never gets anywhere. I like to start with the end in mind; in other words, our total revenue goal. This makes budget creation just like a project; start with the end goal and figure out how you’re going to get there, item by item. Here’s a bit more detail about how I create a budget for my company or when consulting with a client.
Phase 1: Gather the ingredients.
Before I can begin “cooking up” a budget, I need some information.
P&L statement for the entire previous year. I like to look at the big picture rather than each department.
Goal statement. Our goal is to grow by 20%, and we want to raise our bottom line number by 15%.
Industry standards. Many industries have budget standards that are helpful in determining what percentage of revenue should be allocated for which expense areas.
Phase 2: Evaluate the Income
Calculate your projected revenue. I took our last year’s revenue and multiplied it by 1.2 to reflect 20% growth.
Next, I look at the sales numbers to determine realistic growths for each of our services. For example, we don’t sell a lot of hardware, so I decided to keep that number flat. To keep our total revenue growth at 20%, I have to adjust the growth on another item we sell. Software sales continue to grow for our team, so I increased it to 28% for next year.
Phase 3: Evaluate the Expenses
I needed a realistic view of the expenses, so I went through each category to determine whether I felt cost would go up or down. You need the right balance of expenses to achieve results, or enough expenses to ensure you’ll achieve the growth you desire but not too many so that your bottom line will be impacted (hence our 15% goal).
Phase 4: Put them in the right place
My final step in creating the budget was to break the budget into departmental responsibilities in terms of income and expenses.
Using QuickBooks to Create Your Budget
QuickBooks makes creating a budget pretty simple. If you have no growth plans, you can simply auto-populate based on last year’s data. We do have a 20% growth plan in place, so I exported the budget into Excel, manipulated the data I needed to (see above) and then put the results back into QuickBooks.
Every budget is an Educated Guess. I’ve worked with many clients over the years that didn’t have a budget. The above process sent them in a tailspin: “what if I can’t meet my revenue goals, what if the cost of my raw materials goes up?”
You have to start somewhere. When you create a budget, you learn more about what numbers you are capable of hitting and which numbers are a stretch. If you need help creating a realistic budget for your business, we can help.