Listen in as James and Megan wrap the February theme of Business Finances. This episode gets to the nuts and bolts of everything they’ve been covering in the last few shows.
Today’s Kryptonite: Your Business Budget!
Why do you need a budget?:
- Remember that cash flow is king. Having an effective budget will enable you to manage your cash flow, make wise decisions, and ultimately stay in business!
- A budget is not meant to limit your business, it should help strengthen your business and enable it to grow.
What does an effective budget look like?:
- A budget is not sitting down at the end of the month trying to figure out what you spent money on and hoping it was less than your revenue.
- A budget should be forward looking, just like your strategic plan. You begin by building out your annual projections, then break that into quarterly and monthly projections.
- Just like your strategic plan, your budget should be a living document that gets reviewed and updated at least monthly.
- In your budget, you need to account for all of the expense categories discussed in this series:
- Cost of Goods Sold
- Selling, General, & Administrative expenses
- You will also project your anticipated revenue in your budget. Keep in mind that depending on your business, there may be seasonalities or other ebbs and flows you need to account for.
- By matching up your anticipated monthly revenue and expenses, you should be able to predict your net income on a monthly basis and your corresponding cash flow.
How can you build an effective budget?:
- An effective budget can be created in Excel, QuickBooks, or other accounting software.
- First, you want to understand your recurring monthly expenses. If you’ve been in business for at least one year, you can use your previous year in business as a basis to build from. If you’re just starting out, your will have to use your best estimates. These can include your rent, utilities, internet access, and any memberships or subscriptions you have.
- Next, identify what your non-recurring expenses are. These could be one-time expenses, such as your annual Chamber of Commerce membership, or expenses associated with a specific product or service launch.
- Now begin filling in all of your other anticipated expenses, including taxes. If you don’t know how much to put aside for taxes, start with 25-30 percent of your revenue.
- The next step is to fill in your anticipated revenue. If you schedule or book your work ahead of time or have people sign up with monthly payments, this will help make your projections more accurate.
- With your anticipated revenue and expenses, you can now calculate your anticipated net income and determine what should be set aside each month for retained earnings.
- Finally you should be able to see on a monthly basis what your cash flow is. If it’s not what you want, you can dig in to the budget to see where you may need to bring in more revenue or reduce expenses.
- Once you have your budget set, review and reconcile it on a monthly basis and make any necessary updates or adjustments.
- If you’re still not set-up on a method to keep your financial books, do it now!
- Build out your initial budget and follow it for the next month.
- Read The Financially Savvy Entrepreneur by Emily Chase Smith.