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Preparing Your Business Budget
www.motivatedentrepreneur.com
Money & Finance
Preparing Your Business Budget
By Ryan M. Hoback, Motivated Entrepreneur Incubation & Consulting
So you’re ready to chart the future of your business, you have conceptualized your vision and you are now ready to plan the budget for your business. This is a big step, and an integral part of business planning which will serve as a very important catalyst toward achieving the goals you have set. The first step you want to take in preparing your budget is to label and identify your objectives behind the budget. Your budget will help you assess the risks and rewards associated with running your business.
First you need to determine the objectives or desired results you are seeking from the budget you’re developing. Whether you are to expand and grow your business or determine your return on investment (ROI), preparing a budget will aid you tremendously in structuring your business. Once you have determined your objectives and reasons for preparing your budget, the next step is to gather together all the information necessary to assess and prepare your financials.
Example:
Sue’s Pest Service
Objectives: Develop projections for my start-up business
Show my ROI – Return On Investment
One good place to start is to list all your accounts, that is, each expense category and how much you will spend on that category for the allotted time frame of your budget.
Chart of Accounts
Labor (3 Pest Control Agents)
Materials (Spray Tanks, Pesticide)
Utilities (Lights)
Rent
Office Equipment (Stationary, Flyers)
Developing the chart of accounts allows you to begin comparing your numerical data. The next step involves identifying and determining your fixed and variable expenses. Since you have developed your chart of accounts already this is a good reference or starting point, remember, your fixed expenses generally stay the same. Examples are insurance, rent, salaried wages, interest, and office maintenance. When projecting fixed expenses for years ahead, take into account any raises that may be coming to employees or any changes expected in expenses to come.
In addition to the fixed expenses, you must determine what your variable expenses will be. Variable expenses are just as they sound, they are expenses that will change or vary depending on sales. Some examples are the cost of goods for resale, as well as the cost of labor in some service industries. In addition, advertising expenses, commissions, and payroll taxes can vary. You should list out the different categories you have deduced to be variable, and then allocate percentages throughout.
Fixed Expenses Variable Expenses
Rent Pesticide Bulk Rate
Salaried Wages Advertising
Commissions
Once you have determined your variable and fixed expenses, it’s time to look at your expected sales. You will calculate this by multiplying the expected number of sales by the selling price of the product. If you are in a service industry or have a service aspect to your business, you need to determine the expected service income. In determining your income from services you must deduct the expenses involved with those services, from the total revenues they brought in. The resulting number is your income contribution from services.
Sales
50 homes twice a month = 100, multiplied by $75 per service equal $7,500
Termite Service 5 times a month @ $8,000 = $40,000
=$47,500
Labor $25 per service, multiplied by 100 = $2,500
Materials $5 * 100 = $500
Expenses $10 * 100 = $10,000
=$13,000
Income from Service Contributions = $34,500
Now it’s time to compare revenue and costs. Total up the fixed and variable expenses, and then add to that your desired gross profit. This number will serve as the benchmark for reaching your desired level of success. Once you have determined the fixed/variable expenses plus your projected gross profit, you need to calculate the revenues. Take your service income contributions that you figured earlier, and then add the revenues from your various product sales. This will result in your total revenue, based on your present outlook. Subtract your (Fixed/Variable + Gross Profit Expectations) from your (Income from Service Contributions + Product Sales)
Fixed + Variable = $200,000 + $45,000 salary for Sue (Gross Profit) = ($245,000)
1000 Bottles per year times $25 = $25,000
Income from Service Contributions $34,500 times 12 = $414,000+ $25,000 = ($439,000)
$439,000 - $245,000 = $194,000 above expectations ($194,000 Gross Profit)
Sometimes resources are enough to cover your desired level of profit, sometimes they are not. By developing a budget, you can make realistic projections and modifications to crucial areas in order to obtain higher profits.
In conclusion, preparing a budget allows you to paint a financial picture of your business plan by identifying and researching your fixed & variable expenses you will make it much easier to make better business decisions while evaluating your business profits. Remember, your budget should always provide you with an adequate return on investment (ROI). If the ROI is not very high, or as high as you would like, you may need to reconsider your approach to the business.
© Copyright 2004-05 by www.motivatedentrepreneur.com
About the Author
Mr. Hoback is Founder and President of Motivated Entrepreneur Incubation & Consulting. They specialize in helping entreprenerus achieve success starting adn growing their business.
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