The Essentials of a Simple Budget - Part 2
We discussed why a budget is important in Part 1: The Power of a Simple Budget but what actually goes into making a budget? With only basic information that should be available through your accounting software you can create a budget that will paint you a picture of your financial health and help you decide which decisions make the best financial sense.
Let’s begin by talking about every business owner’s favorite thing – expenses! Starting with expenses will tell you how much revenue (the fun stuff!) you’ll need to turn a profit. Using an accounting software, like QuickBooks Online, you can pull a report to see what your expenses were over the last 12 months. Using the information provided about your last 12 months, you can project what you’re going to spend in the next 12 months! A few questions to consider when projecting out your future expenses:
Were there any expenses in the last 12 months that was a one-time event that won’t be repeated in the next 12 months?
Are there any one-time expenses in the next 12 months that you know about that weren’t incurred in the last 12 months?
Are there any new recurring expenses that will begin in the next 12 months? This could include new subscriptions, new employees, or new a new loan.
Additionally, budget time is a fantastic opportunity to ask the following questions to determine if there is an opportunity for cost savings:
Are there any recurring expenses such as subscriptions, utilities, or marketing costs that seem to be too high?
Are there any expenses that are no longer needed?
Are there any expenses that I wasn’t aware were being paid?
Once you have answered these questions, called your vendors to ask for discounts, switched vendors for significant savings, and cancelled services you no longer need, you will have a great projection for your expenses over the next 12 months and how much revenue you need to run your business!
Now that you know how much it is going to cost to operate your business – you know how much you need to earn in revenue to cover those costs. Again, using your accounting software, pull a report to review what your revenue was over the last 12 months and ask the following questions:
Was there a revenue sources that were unusually large or uncommon? If so, do I expect that to be repeated in the next 12 months?
How do I expect my existing revenue sources to change – will they decrease (hopefully not?), stay the same, grow a little, or grow a lot?
Am I planning on introducing any new revenue sources and, if so, how successful do I expect it to be over the next 12 months?
Now, every business owner wants to think that all their revenue sources are going to explode but before you put that growth in your budget make sure you can justify “why” you think that growth is going to happen? Are you spending more on your marketing efforts and expect that to result in increased revenue (did you include that extra marketing expense in the first part of your budget?), did one of your competitors leave the area and you expect an inflow of customers, or is something else driving growth? A budget is not a place to be blindly optimistic but rather diligently realistic.
The Finished Product
Congratulations – you now have a budget to help guide you over the next 12 months! First you put the effort in to look at your expenses, plan for anything that will be big, called your vendors and scored some great savings, and even found a few expenses you forgot about that you called and cancelled! Then you were realistic when estimating your revenue by supporting any growth you projected. Now, you have an estimation of what your net income (revenue less expenses) and financial health will be over the next 12 months. Now you have the power to test out some potential strategies or scenarios to see how they could affect your business:
What happens to revenue if I increase my price by X% which leads to a Y% decrease in customers?
What happens to net income if my biggest client leaves?
What if I increased my marketing budget by X and that results in Y new customers leading to a Z% increase in revenue?
Does it make financial sense to purchase a new work vehicle or buy a new building?
What happens to business profitability if I increase my own compensation by $X?
Ask for Help
While a budget doesn’t have to be complicated – it can still be a daunting task to undertake. Do not hesitate to reach out to a trusted advisor such as a mentor, accountant, bookkeeper, or consultant who can walk through the process with you. A second set of eyes on your projections, reasoning, and assumptions can help keep you honest, realistic, and accurate! The more effort you put into your budget and the more realistic it is – the better it will serve you and your business.
Check back the week of October 15, 2018 for my next blog where we how working offsite can spur creativity and lead to awesome new ideas.. In the meantime, be sure to read our other blogs written by fellow Co-Founders and Strategic Consultants Kyle Parker and Benjamin Record as well as listen to the Propell3e Podcast, where we talk about our business topics and interview business owners, professionals, and influencers about their businesses and lives.