So you are considering a small business. More than hopes and dreams you will need to invest yourself in plans. A successful small business does not spring spontaneously from a wish. It needs the foundation that can only be provided by:
• Market research - Is there a need for the service/product I want to provide, who is my competition? Who is my audience?
• Business plan - What are you planning to do, how are you planning to do it? What expertise/experience do you bring to the task?
• Budget – How much will it cost? What will be the return? Lists all anticipated income and expenses for a specific period (typically your fiscal year).
Each is a valuable tool that can increase your chances of success as a small business owner. This point cannot be overemphasized. Do not allow enthusiasm or even fear to lead you away from completing the basic steps of starting/managing a small business
(There are a number of resources and people to consult for additional information if the prospect of writing a budget still feels overwhelming).
Although each step may require a good deal of thought and energy you will find in the long run that you save time and gain the control you need navigate even the choppiest waters.
Your budget should give a complete accounting of all anticipated revenue, revenue streams and expenditures. The budget is closely related to the business plan in that it details the plan in financial terms. For example, if you plan to hire two employees, your budget should include the money you plan to disburse for their salaries, benefits and taxes. If you plan to purchase or lease equipment the expense should be included in your budget. Planning expenses helps you determine how much revenue you will need to meet expenses and generate a profit.
Revenue
The money you take in for your goods and/or services is called your revenue or income. Your budget should reflect the dollar value of sales and services anticipated for a specific period (consider planning an annual budget then break it down for each month).
To arrive at this number it is a good idea to review profit and loss statements for the previous period, if available. If this information is not available, make your best guess using information from your trade journals and market research. Be specific. How many bicycles will you sell this month? At what price? How many consultations will you provide? At what price? At the end of each month compare budgeted vs. actual income and adjust accordingly. If the amount you take in exceeds your projections give yourself a pat on the back and look for ways to keep this trend going. If you did not earn as much as you planned – look for the why. What can you do to beef up revenue next month? Are you charging the right price? Are you offering something that is needed? Do you need to step up your marketing? The beauty of the budget is that it can accurately highlight what is working and not working as well as what you should continue and what you shouldn’t.
Income should be recorded on a cash basis. For example, billable services should be counted as income in the month of receipt. Have a backup plan for the (hopefully) rare times that you are not paid for services in a timely fashion.
Revenue Stream
If you sell bicycles and sponsor bicycle tours, each represents a different revenue stream. Your budget should include anticipated income from each revenue stream. Again, categorizing each revenue stream allows you to identify which aspects of your business are profitable and which are not.
Expenditures
Your budget should also include all anticipated expenses. Some of these will be fairly constant, or fixed, such as rent, leased equipment and salaries. Others, such as hourly wages and materials, may vary. A comparison of income and expenses will reveal any gaps. The budget can help you plan around these gaps and avoid cash shortfalls.
You need not sit down with pen and paper to write your budget. There are a number of excellent software programs that make short work of budgeting. These programs can serve you well by reducing arithmetic errors, generating customized reports (such as profit and loss statements, reports on specific revenue streams or budgeted vs. actual expenses) and creating importable data. Most are very user friendly, affordable and require no accounting experience.
There are a number of advantages to writing a small business budget. These include:
• The opportunity to reflect on the thoroughness of your business plan.
• Provides an annual and monthly picture of income and expenses.
• Outlines information you will need to complete loan/financing applications.
• Gives you the control you need to head off problems and plan for success.
• Gives the opportunity to plan ahead for shortfalls, slow downs, and busy seasons.
• Gives opportunity to plan finance or purchase of capital expenditures without too much distress.
• Lets you plan for a profit.
• Can pinpoint successful areas as well as those that may need additional marketing or other tweaking.
The budget should be regarded as a dynamic and fluid document. As such, you should refer to it regularly and make adjustments as needed. Your budget also helps you focus on monthly targets in terms of income and expenses. It also provides an objective view of how you are doing. This can be a great motivator for you as well as for your staff. Much more than a burden, the small business budget is a critical tool for planning and success.
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