Many small businesses do not create a budget to set goals or plan key expenses. The idea behind a budget is to plan for profit and make sure your revenues and expenses are aligned to support your business goals. A budget is important in order to determine if your business is generating enough revenue to cover costs and expenses as well as producing a profit, budgets also allow a business owner to monitor sales, expenses, and implement changes in order to keep their business on track. Finally, a budget is similar to a compass and nautical map of a ship it provides a course and direction, giving a business owner the ability to break down future business goals in smaller monthly milestones.
In order to create a successful business budget a business owner must do the following:
1. Collect your accounting data and break down each month individually, keeping your business accounting records updated and in proper order is very important in order to forecast correctly.
2. Discuss and set business future business goals, ask yourself questions like: What are my sales goals for this year? What costs can I eliminate? What marketing strategies will I deploy each month? What is my profitability goal for this year?
3. Develop realistic and quantifiable numbers around your business goals, for example: I want to increase my sales by 10% in the first Quarter of this year, or in order to initiate a new media advertising campaign, I want to increase my marketing budget by 5% in January and February.
4. Using historical accounting data as your baseline, add your quantifiable goals in order to develop a new monthly forecast. Remember to adjust your initial forecast by considering any anomalies that might have happened in the past. For example; if you had an unusual slow month last March because of weather conditions, consider revising your baseline in order to account for March’s “anomaly”.
5. Track your Variances! Once you have developed a new forecast for each month of the year, consider developing a template (see the example attached) that allows you to track both actual numbers and what you forecasted. Consider calculating the difference and % of variance between what you forecasted and what your actual numbers were for each month. This will allow you understand if your expectations (what your forecasted) was met by your actual totals.
6. Adjust as you go! Each month review your forecasted volumes making adjustments (as needed) to your initial plans. For example; if you realize that advertising expenses is consistently higher by 2 % of what you initially forecasted, consider adjusting the rest of the year projections, or making appropriate adjustments in order to bring this expense back in line.
7. Each month, review your current actuals vs. your future forecasted totals, making sure you are still on target to meet the initial goals you set to achieve this year. This will allow you to make immediate and necessary adjustments in order to reach your targeted goals.
Click on the link below to download a sample “Rolling Budget & Forecast” worksheet we developed that you can use in your own business, in order to track and evaluate your business performance.