“We didn’t actually overspend our budget. The allocation simply fell short of our expenditure.” - Keith Davis
Got a budget? If you own a small business, you need one. Here are some reasons why:
• The budget acts as a set of guardrails to keep you, your team and your business on the right path.
• If the assumptions and predictions used to create the budget are reasonable, it’s a tool for helping you achieve the projected results.
• It helps with delegation. Instead of your people coming to you and asking, “How much can we spend on marketing?,” you can refer them to the budget. Side benefit: It helps you teach your people business.
• Your lenders will like it, making it easier for you to borrow money.
• The process itself is good for you. It forces you to take time out and think about the business.
If you’re serious about business success, you simply cannot do without a budget. The good news: It’s not that hard.
Here’s a simple process for creating your budget:
1. Get ready by printing your income statements for the last two or three years. If you’re doing this late in the year in preparation for next year, print the current year’s profit and loss statement and then estimate where every line item will finish for the year.
2. Fire up a spreadsheet, and name rows to match those on your P&L.
3. Start with sales. What will this year’s sales be? What were the sales results last year and the year before? What has the sales trend been? What’s going on with your market, customers, products and services? Based on your best information, project next year’s sales. Optimism is great, but be sure to forecast what you can do and what you genuinely think you will do, not just what you want to do.
4. Now turn your attention to cost of sales. Chances are, this can be projected as a percent of sales. Confirm this by examining your last few years’ results. Once your cost of sales is plugged in, gross profit falls into place.
5. You’ll have many overhead expense line items to deal with:
• Some, such as rent, may be the same dollar amounts as this year. If so, plug ’em in first.
• What line items will you be changing? Employee raises? Hiring?
• What changes will be imposed on you by your suppliers, such as health insurance price increases?
• What are your sales and marketing plans, and what will they cost?
• Some may be predictable as a percent of sales. Again, review your statements to see which they are and insert them next.
• Continue filling in all your expense line items, of course with an eye on reducing costs.
Hopefully your numbers resulted in a reasonable bottom-line profit. If not, go back and see what you can tweak, but be sure to use realistic numbers.
Running your business using a budget can be the difference between mediocrity and real success. Get started today.
“Do it. Do it now.”
- Arnold Schwarzenegger
Bill Collier (firstname.lastname@example.org) is the author of “How to Succeed as a Small Business Owner … and Still Have a Life” and is the St. Louis area coach for The Great Game of Business. He helps businesses use open book management to teach their employees to think and act like owners. He can be reached at 314-221-8558.