What do I do about establishing a budget, recording sales, costs and other financial aspects of my business including tax preparation and cash flow and operating statements?
Business people budget for many of the same compelling reasons they prepare a business plan; it is a roadmap of how your business is going to progress over the budget period, usually a year. The budget is the numerical representation of your operating plans for the selected period. The lack of a budget indicates the lack of a plan and we all know, a business without a plan is a plan for failure.
Starting with your marketing plan, the basis for your revenue projections, make a list of all of the factors which will impact your business during the upcoming year, e.g.:
- Demographic changes that may be occurring (Is the population in your market growing or shrinking? Is the mix changing?)
- Any seasonal impacts.
- The effects of new advertising or other promotional activities.
- Price changes for next year.
Examine every element of your business and its market environment for changes that could impact sales.
Next, put a value on these changes, add them to the prior period’s actual revenues and, voila, you have your revenue for the budget period.
Do the same thing for cost of sales and manufacturing costs as well as expenses. Take the list of changes you identified in your revenue forecasts, carefully consider whatever additional changes, which only impact costs, and factor those into your budget for costs and expenses. After determining your costs and deducting them from revenues, you will know how much your profit or loss is going to be for the next budget period.
The budget needs to be projected month by month and actual numbers compared as soon as possible after the close of the month. If changes have to be made to the operating plan in order to meet the budget, it is best to start as soon as possible, therefore, it is imperative that the books be closed and reports prepared as soon after the close of a month as possible.
Changes in asset values and liabilities need to be identified and included in a balance sheet projection. Sales or purchases of assets, loan repayments, capital additions or withdrawals, receivables losses, etc. need to be considered in your balance sheet budget.
For a small business, the most critical measurement of all is Cash Flow. This might better be called cash planning because the cash flow budget is a guide for determining when you need to inject cash into the business and when you can take some out. Your cash flow statement is comprised of these elements:
Beginning Cash Balance (From last month)
- Cash Sales
- Accounts Receivable Payments Received
- Other Cash Receipts
Total Cash Inflows
- Capital Purchases
- Cost of Sales
- Change in Inventory (increase is negative, decrease positive)
- Business Expenses
- Add Back Depreciation, a Non-Cash Item
- Income Taxes
- Loan Payments
- Interest Expense
- Loan Repayments
Total Cash Outflows
Operating Cash Balance
Line of Credit Draws
Ending Cash Balance
All of the above information is available from your profit and loss and balance sheet budgets.
If you are a startup business, your budget is included in the first year of your business plan financial data. If you are an existing business, you probably have an accounting program such as Quicken, Quick Books or Peachtree Accounting all of which have a budget component. If, however, you choose to prepare your budget separately, budget forms abound on the internet. Just Google, “Budget Forms” and choose the form you prefer.
Your budget is a very important part of your business. It is even more important that you, the business owner, is involved in it and that you understand its contents and examine the monthly reports that compare actual results to budget. It is an excellent tool to help manage your business.
For more information on budgeting try the business section of your local library and/or the internet. Try,www.about.com and query business budgeting. Also go to www.score.org and www.sba.gov.