Many
entrepreneurs launch a new business without carefully analyzing the
financial prospects in advance. They think all they need to do is sell
enough of the product to create a profitable business, but this is seldom
the case.
The
act of budgeting for your business forces you to think through all the
important numbers and to develop a picture of what your business is going to
look like in three, six, nine and 12 months. A budget is a powerful business
tool that will help you make better decisions. It enables you to develop and
maintain a thorough understanding of the internal financial workings of your
business.
One
of the most important skills of any entrepreneur is the ability to prepare
budgets and accurate financial forecasts for the business. Your ability to
set financial goals for sales, expenses and profits is a true measure of
your ability to succeed in business.
The
purpose of a budget is to give you a visual description of the expected
financial results of your business activities. When preparing your budget,
remember that:
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It
should cover 12 to 24 months of business operation.
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You
can use paper spreadsheets that you fill out in pencil.
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Computer
programs like Excel will enable you to change numbers quickly.
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You
should work out a complete budget before beginning business operations.
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Each
month, you should review, revise and update your budgets for the next 12
months.
A
basic business budget contains four major numbers: projected sales and
revenue; projected total costs of achieving that level of sales and revenue;
the profit or loss from operations based on the two numbers above; and the
cumulative total of profits and losses over time.
The
first and most important number is the top line—the estimated sales for
the month. This number should be the result of a complete analysis of your
marketing and sales activities, so your ability to project this number with
accuracy is a key measure of your talent as a businessperson. Make sure this
figure contains high, medium and low sales estimates.
Your
sales and revenue projections should be based on experience, market analysis
and research. However, it's worth nothing that your business should still be
profitable even if your low sales estimate turns out to be correct.
The
next part of your budget should include all the costs of operation involved
in producing and delivering the product or service to customers. These
include:
-
The
costs of purchasing or producing the product or service.
-
Sales
and marketing costs.
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Your
business's administration and operation costs.
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All
fixed, variable and semi-variable costs of business operation.
Your
final number should include 100 percent of all out-of-pocket expenses
necessary to achieve your estimated sales revenues.
The
next part of your budget is the total profit or loss from operations for
that month. There will sometimes be months of the year where your business
loses money. In a new business startup, the first few months will usually
show losses. The general sales and profit trends are most important.
Lastly,
your budget should reflect the cumulative profits or losses of the company
over a period of months. Profits and losses are added together each month to
get a total; these totals tell you when your business will break even and
begin earning a profit. The total of losses will tell you how much money you
will have to borrow or provide to the business before it is profitable. An
accurate budget should reveal the truth about your business's potential.
Each
major number in your budget should be reviewed each month. You should
compare the actual results in each category against the projected results.
The act of studying each number each month will improve performance in that
area.
When
entrepreneurs invest in the preparation of accurate business budgets, they
save enormous amounts of time and money—and often many months and years of
wasted effort.
