There are a couple of really excellent reasons to spend a few hours preparing the annual budget. For many people running small businesses it is one of the few occasions when they will sit quietly and think about what they are trying to achieve in the year ahead. In the first instance, the budget gives an idea of what they are going to sell, who they are going to sell it to and how much they are going to be able to charge for their products or services and the revenue generated as a result.
The sales and marketing budget gives a statement of intent as to how time, effort and money is going to be spent on promoting the business and the channels used to achieve the desired sales. It is the time to assess if new hires are necessary to increase the sales or marketing effort.
The expenses of running the business always need to be reviewed in the budget – the normal costs of running an office / premises need to be examined and any changes that arise as a consequence of increased, new or different activities can be planned and accounted for, whether that is the wages of new hires to increase production capacity or additional office or factory capacity to accomodate the increased staffing.
The real purpose of budgetting is of course to map out how much money the business is expected to make (or lose!). For businesses that are not relying on third party funding to pay the wages and give return on investment, profitability is a key to keeping the doors open. No matter how many times people tell you that the purpose of a business is something lofty, the bottom line is that you are only going to stay in business if it is generating sufficient profits to make it worthwhile. It also gives you an idea of if, when and how much additional funding will need to be added to the business to pursue a particular activity.
A budget is a snapshot of your thinking and aspirations at a particular moment in time. Invariably, circumstances change and the budget adjusts over the time frame it is planned for, but it is an extremely useful review tool to compare where you are to where you thought you might be and assess the reasons for the difference and adjust accordingly!
So broadly, how do you prepare your budget:
1. Work out how much your sales will be for each product or service you offer.
2. Determine your cost for producing each product or service.
3. Work out your net sales or your gross margin - Sales minus cost of producing each item. It is often expressed as a percentage of your net sales divided by your gross sales.
3. Estimate or work out the expenses of running your business for the year - marketing costs, wages and employees costs, rent, rates, electricity, heat, etc.
4. Subtract your expenses from your net sales and you have your profit (hopefully!) before interest, taxes and other forms of depreciation.
This exercise is really simple in theory but it can be fraught with poor expectations and poor planning. It really is worth taking the time to do it properly, so it can be used as a reference guide for the year ahead!
It can be worth getting an outside view on your budget if you are struggling - we are here to help! email me at email@example.com