Are you one of those small business owners that believe only the larger companies need to prepare formal budgets to better control financial performance? If so, you are not alone, but you are also missing a valuable financial tool and a process that can greatly enhance your company’s ability to reach your financial goals.
Many entrepreneurs feel that developing a budget is a huge waste of time. Coupled with the seemingly enormity of the task and the fact that results are not immediate, they believe that all of the other tasks they are juggling take precedence. This is short-sighted thinking at best and will cost you in the future in ways that you will not realize. A budget is an extension of the financials goals you have for your business. In most cases, entrepreneurs became entrepreneurs because of the financial rewards they think working for themselves will provide. So if the financial rewards were important to you when you started your business, why would you leave that aspect of your business to chance with little to no formal, written plan for financial success?
Business experts agree on few things, but they unanimously agree on the importance of a budget. What is a budget? It can mean different things to different people depending on their goal and purpose. In the best sense, a budget is a blueprint of your business. It is what you hope to accomplish over some period of time; monthly, quarterly or annually. It describes and formalizes the financial happenings of your business. It gives you a map to follow that will then allow you to have better success of financial profitability or will give you great information you can use to adjust your goals in order to achieve financial success.
Budgeting starts with a forecast. For some businesses, the easiest place to start is with the volume of potential sales that you then convert to dollars. For others it may well start with sales dollars based on past history, if you have history, or your goal and then is converted into the volume necessary to generate those dollars. Either way, budgeting means looking at your business and either using past history or future goals to formalize the path you need to take to realize your desired profitability or know the reason why you did not so you can then adjust.
If the thought of creating a budget creates a vision of endless number crunching and numerous headaches, relax. It is not nearly as bad as it sounds and you will be surprised how much you will learn throughout the process. Plus, it gets easier as you go along. The rewards of the knowledge you will gain and the potential of seeing more profit and knowing more than one way to increase your profit will make you a fan of the process.
Step 1: Sales Forecasting
There are many ways to prepare a budget. but usually the heart and soul of the process is an accurate sales forecast. Plus, sales is usually the topic that most business owners feel most comfortable with either because of past history or a very specific goal they want or need to achieve and it is the life-blood of your business, so you are very interested in what your sales are, what they need to be and how to make more of them. With a sales goal, you can then start to determine the amount of expense it should take to achieve that revenue goal. The budget then allows you to evaluate your actual performance against what you thought should have happened and make the adjustments required to get closer to your desired profitability and financial success.
If you currently have an up and running business, look at your sales over the past few years and project what you think you can achieve in the future. Make it as detailed as possible. If your sales are seasonal, then prepare a sales forecast for every month based on past history plus the improvement you are wanting to see. If your forecast is in dollars, convert those sales dollars to a volume of sales or a number of sales that you need to make in order to bring in the monthly sales budget. From that breakdown, go as far into the detail as you can; average amount of sales required every day, number of hours billed every week, etc. Whatever is specific to your particular business. The more detailed you can get, the better this information will work for you when determining why you do not meet your budgeted amount and how you can either adjust your sales efforts or adjust your budget.
Start with a sales forecast, see how detailed you can get with how to achieve your forecast and then come back to the blog for Part 2.