You’ve got your receipts and bank transaction documents, along with your bookkeeping software open. So, you know the history of your financials. What do you do now? How do you even begin the mountainous task of preparing a budget?
The key to making the process easier is to remember that, at the end of the day, a budget is the means by which you can achieve your financial goals.
Be flexible and fluid – things can change, so you should always be ready to move your numbers around if necessary. They are not to be set in stone.
Preparing a Budget – Step #1
The first step in preparing a budget is to assess the product or service that you are selling and how much you are currently charging. For instance, you might already know that you will be selling $2,000 worth of your products or your time once a month. It can be difficult to forecast how much you will sell in the future, but you can always start with what you already know. You may know, for example, that a particular client orders a certain amount from you on a regular basis. From there, you could extrapolate that this trend will continue in the foreseeable future, or perhaps you can decide to up-sell to them and encourage them to increase the quantity of purchases from you.
Preparing a Budget – Step #2
Next, you will need to analyse the cost of sales and expenses.
Ask yourself: what did it actually cost me to make that sale?
If you are selling a product, consider what costs were incurred in being able to sell that product – for instance, shipping costs and swing tags may be a cost of sale on a clothing item. If you are selling your time, the cost of sale then becomes you and your time. Staff costs, including the payroll and holiday pay, would constitute a cost of sale if you are selling a service. Expenses or overheads, on the other hand, are costs that come through the business that are not directly incurred by the selling of the product or service. Renting a telephone, accounting and general marketing costs would be considered part of the overhead. You will have these expenses month after month, whereas the particular cost for making a particular sale may not be there again next month. It is important to differentiate between expenses and overheads, because in making your profit and loss report, you can examine your gross profits and question whether a particular product or service is profitable and should be continued. Once you are able to construct your profit and loss report, you should then create your cash flow statement to track the money going in and out of your business.
Preparing a budget doesn’t have to be a headache, especially if you keep an eye on your finances throughout the year.
To avoid financial blind spots, review your budgetary spreadsheets on a monthly basis to compare and contrast the projections and the actuals. Remember to keep it simple initially, and just give it a go! This post is based on HerBusiness’ Small Business Finance Course, a three-part online course designed to arm small business owners with the skills to better manage their small business finances. For details of upcoming courses, call us on 1300 720 120 or visit the upcoming events page on our website.
