Setting up a budget will help you to better understand the direction that your business is heading financially. This can help you make improvements and corrections before making any big mistakes.
Gathering the Figures
Setting a budget is not as hard as it seems. All you have to do is to look at your last year’s figures – that includes expenses, sales, income, etc. In short, your Profit and Loss Statement. Then you need to make a new chart listing your previous figures and make new columns to plug in the new proposed figures – sales, expenses, etc. Your sales figures can be based on the average increase in sales in the last couple of years. It need not be exact.
Expenses like electricity, plumbing and air conditioning should also be noted. Also, if there are to be any one-time expenses, such as repainting or any major repair work in that particular year, those should also be added, since you will have to pay for them.
Again, to plug in these expense figures, you can refer to your expenses incurred in the previous year or years. If you are a first timer at budgeting, enlist the help of a business friend or accountant until you get the hang of it.
Once all the figures are added up, you should have an indication as to where you are headed in the New Year. Keep this budget in a prominent place in your office. You will now have to plug in your actual monthly sales and expenses and compare them with your budgeted figures.
Comparing your budgeted figures and actual figures will help you to understand where you need to improve (e.g., either increase sales or control expenses). To keep your budget as accurate as possible, plug in all your expenses and other details under different headings. This way, your budget outcome will reflect your entire financial picture more accurately.
Also in your budget, make a provision for unexpected expenses, which always come up. If at the end of the year, you do not have any, they will end up becoming your savings, and should be reinvested in the business.
Work Around the Figures
The good thing about having a budget is that you can work around the figures. For example, if your sales are not as good as expected, then you can try and lower your expenses. Or if your sales figures are better than expected, then you can invest that amount in business improvements or new equipment, like getting a new truck for deliveries or hiring new staff to handle extra sales.
You could even take out that money and invest it outside your business. The upshot is that your budget will make you more responsible in handling your finances. You can use this same method to make a budget to manage your household expenses, which will amount to better control of your home finances.
The good thing about setting a budget at the beginning of the year is that once you get the hang of it, you will realize that it is a very effective tool in monitoring your finances and improving your business – all year long.