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Budgeting Basics for Small Business Owners

It’s that time of year! Have you started your budget for the New Year? How are you doing on your comparison of actual to budgeted figures for this year? Are you on target with your budget? Don’t understand what I’m referring to? Then it’s time for Budgeting 101!

A budget is part of your financial roadmap. How do you know where you are going if you don’t have a destination selected and the road that you are going to take mapped out? Just throw the dart and see where it lands? If so, you make up the majority of small business owners. However, that trend is changing. With changes in the economy we are faced with even more outside pressures on our business to be profitable. Lenders are more selective about giving money to those who don’t have enough security to ensure their return on the loan. Yeah, it’s the same old story that they always want to give money to those who have money. What about those of us who don’t? You better have a solid set of financial statements to show that your business is viable and going to be a wise investment for the lender.

Lenders want to get a return on their investment (i.e. loan to you) so they will want to see how you’ve been doing. In addition, they want to see what your predictions for the future are. A budget or financial projection is going to be sought by the lender. They want to see how you are mapping your future of success.

Breaking your budget into monthly increments will ease the process and it won’t seem so overwhelming. Prepare some general goals for your financial budget for the year and then see how you can achieve that goal, one month at a time through a monthly budget.

Questions a budget will help you explore include:

What do I anticipate for my:

Income? Expenses? Capital Expenditures? Savings?

Often times we’ll use the excuse that we don’t know “how” to do a budget because our income and/or expenses are too hard to predict. Don’t you want to have an idea of where you are going? The challenge for the New Year is for you to be more proactive with your finances. Whether you are running a service or product-based business! Reactive financial management often leads to the demise of our finances and our businesses.

Budgeting doesn’t have to be an overwhelming task. Follow these easy steps and you’ll be amazed at how easy it is to achieve your goals! It’s not too late. This is a great time to start the budgeting process so you can work on the budgeting project in small increments.

Where should you start?

1. Analyze your current and prior year(s) budget. It’s always a good idea to know where your starting point is! What areas did you do well on? What areas do you need to work on? If you don’t have a budget, and most don’t, then you will need to look at your actual financial statements including:
a. Profit/Loss
b. Balance Sheet
c. Cash Flow Statement

2. Utilize a simple format for your budget based on the Profit/Loss format:
Income
- Cost of Goods Sold
- Overhead Expenses
= Net Income/Profit

Don’t get confused though! Cash and Income are two different concepts, so you need to ensure that you set clear goals for the budget you are putting together.

3. Use the budgeting features in your bookkeeping software to assist you with the development of your budget, if available. QuickBooks® has a great budget format ready for you based upon your Profit/Loss and you can input the budgeted figures into the appropriate line item.

4. Assess your budget realistically. It’s always a good idea to have an objective third party review your information. We tend to overestimate our income and underestimate our expenses so that we show a positive flow for our budget. That isn’t good if it’s not realistic. We need to be aware of where our money is coming from and going to so that we can be proactive in our financial lives. It will be amazing how much less stressful your world can be when you effectively manage your finances.

Make sure to document how you are coming up with your estimate. For example, if you predict $10,000 in sales, you need to document that it is based on the following equation (# of sales multiplied by $ amount per average sale). This will give your predictions substance and allow better variance analysis when your actual figures vary from your budgeted figures.

5. Compare your actual activities to your budgeted activities on a monthly basis. This comparison is what creates the REAL value for you. Comparing helps you to assess what parts of your finances are excelling and what parts need attention. Without comparison, there is no value in budgeting.

When you use QuickBooks®, you’ll have preformatted reports available that will calculate the variance between actual and budgeted income and expense items. This will be a great tool for you to assess which aspects of your business are on target and which areas you need to reassess.

6. Keep your budget as a ”living” document as you may need to adjust it for aspects not previously included. This doesn’t mean to change it because you want your actual to equal your budgeted numbers. Changes in budgeted amounts should be for those times when unforeseen events have occurred or arisen.

We all have many demands on our time, but managing the financial aspects of our businesses is a responsibility that we need to take seriously. If this is not one of your strengths, then find someone to assist you with this process. It’s like any other skill, it takes time to understand the various aspects but it will happen. There’s no better time to take control of your business path than today!

Contact: Pam is the author of Out of the Red, a book that covers budgeting and many more important aspects for small business owners. To order your copy, call 816.304.4398. For more information, you can visit her website at www.rppc.net. Pam Newman is a Certified Management Accountant, Author, and Certified QuickBooks® ProAdvisor for Financial and Point-of-Sale software.