A guest blog post by: Shirley Tan from Ecommerce Systems
Creating annual budgets is important to businesses. How else would you be able to maintain control over your finances and see exactly how company money will be spent? Budgeting allows you to better understand your goals because it shows you the big picture. When you are aware of what your company can afford, you can at least plan in advance to meet your needs, as opposed to making decisions on the fly. In essence, your annual budget helps you avoid surprises down the road.
Estimate Your Income
A vital part of creating an annual budget is estimating the revenues that will come in during the year. Without estimating your income, creating an overall budget and meeting business goals can be quite difficult. For example, if you have plans to expand your small company, you need to have a good revenue-versus-expenses forecast for the year so you can expect to enjoy some profits and still move forward with your plans. But what if the projected income is less than what is expected? Well, the best that you can do is to take countermeasures to reduce your loss. Remember, your revenue forecast will drive your every budget decision. Make sure to create it as accurately as possible.
To determine a workable revenue amount, businesses usually refer to historical data. You can start by reviewing the previous years’ revenues and expenses (more on this later). Also, consider the factors that can affect your current strategy and goals like changes in consumer demands and the economic situation as a whole. Why? Because low demand for the company’s product or services and a poor economy can certainly affect your sales. Then, with last year’s figures as reference, establish a monthly sales forecasts which you will enter into your budget spreadsheet. Once you have estimated your revenue, you can work on the related expenses needed to reach your business goals.
But what if you don’t have any reliable historical data or if you are just starting out a small business? You will have to rely on outside information. Publicly available sales data of businesses similar to yours and industry information in general are good sources. Your local chamber of commerce can also provide useful assistance. Use your researched information to review your goals and business strategy as well as to identify specific factors that can affect your budget.
Estimate Your Expenses
After figuring out how much you expect to make, the next step is to determine the amount you can spend. Usually, this is (again) based on the figures for the previous years, only with a few adjustments for new expenditures and to accommodate current price increases. In this process, there are two types of expenses that must be taken into account – fixed and variable expenses. Fixed expenses are those that are not affected by sales volume. Rent and loan payments are considered fixed expenses because whether your sales are high or low, these amounts will not change. (If your employees are receiving fixed monthly salaries, you should factor it in as well, along with relevant insurance and benefits.)
Variable expenses are those that may either increase or decrease every now and then. Office expenses are often categorized as variable expenses and usually include computers, printers, technological repairs or upgrades, paper, pens, office furniture and even travel expenses. Unlike fixed expenses, this type of expenses may vary with sales. Examples of this are the commissions paid to the sales force based on their performance and the freight costs (which will not be incured in the first place without sales). Generally, these are operating expenses or costs that a business needs to operate and earn profits.
When lay out your projected revenue against the expense estimates, you can have an idea of what the profit looks like. Is the figure enough to support your business goals? If not, make sure to identify want you can change. Do you need to sell more? Or do you have to cut down on your expenses? Make the necessary adjustments until your are satisfied with the resulting figure.
As important as minding your operating budget is building your cash flow budget. Don’t make the mistake of thinking that profitability automatically means success. There are businesses that seem to be showing profits yet experiencing cash flow problems at the same time. To prepare for the peaks and troughs in your cash flow, determine if you are collecting your receivables long after you have made payments for the goods your customers have purchased. Also, identify which areas of your business are most profitable and which creditors or suppliers are owed of the company’s expected profits. This will help you see if there are more outflows than inflows and let you take steps to resolve the issue.
Stay on Track
Remember to see how you are doing and if there are any changes that you need to make. Do this by comparing your budget to the actual numbers in your monthly accounting. If there are gaps, examine the reasons – it could be due to lower than expected sales volume or because you have underperforming products. If there’s a high turnover (hopefully), check whether you have set your targets too low. These steps will allow you to be more accurate with your future budgets.
Modern technology has made it easier for businesses to plan a budget. One of the most useful tools out there is QuickBooks. Its user-friendly interface will allow you to monitor your finances and budget much easily. If yours is a start-up business, a good alternative to get you started is to use spreadsheet templates such as this: https://office.microsoft.com/en-us/templates/results.aspx?ctags=CL102207090#ai:TC010092674|
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Shirley Tan
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