Preparing a Budget

Ok, you say, I know I need a budget, but how do I prepare one? The most common budget period is one year, but this can vary depending on whether or not your business has seasonal or cyclical fluctuations. For example if you run a Christmas decorations shop, or a costume shop your business is going to peak during certain times of the year.

The budgeting process usually begins with the collection of accounting data. In order to prepare a strong and achievable budget, you must analyze each item of income and expense from the prior year. If your accounting system is a mess and the figures are inaccurate, the numbers used in your budget will be useless. This is why it is so important to keep good records. Quicken and Quickbooks are excellent programs to help you with setting up an accounting system that is easy to use and understand.

If you can review your prior year's figures with confidence, try to cultivate your strong areas and look for ways to increase performance or volume. For example, if one particular product sold well, take a closer look at that product. What you did to market it, etc. and try to model your other products in the same vein to accomplish the same results.

You also need to analyze your weak spots. If possible, set up some type of internal control over the weak areas. A cost analysis will help you determine if you are actually making money on the sale of a certain product. This is a big problem with new business owners. They don't do the research or due diligence in determining the need for their product. In effect, they spend a great deal of time and money with a product that is never even going to break even. You cannot get emotionally tied to your product. If it is not selling, let it go and move on to what is selling.

If your business is in its first year, your budget will involve a little more homework. Keep in mind that a budget is an expression of your goals. Try to determine the number of billable hours you might reasonably expect to charge for within a year's time. If you are in sales, try to establish the number of items you will be able to sell. After determining the revenue portion, you should look to your expenses.

Some expenses, like rent, will be fixed because they do not change from month to month. For example, if your office space rent is $3,000 per month, you must still pay $3,000 per month, regardless of whether or not you have made any sales or earned any income. This is why working out of a home office, if you can, is so much better. You can substantially cut your rental costs down.

Another type of expense is a variable one. In budgeting, this is known as a variable "cost," which is a cost that increases with the level of sales or income. They are variable because the more income you generate, the greater the costs you will incur (this just means the more you sell, you more you have to buy).

If you have others working for you, sales commissions are an example of a variable expense-the greater the sales revenue, the greater the sales commissions.

You need to be sure to do research before starting your business to determine what comprises your fixed and variable costs.

Certain types of businesses have an established profit margin. This information may be available by simply asking other professionals in your field. Your accountant sees thousands of tax returns and may be able to give you an idea of the average "cost of sales" or "profit margins" for your type of business. The averages for certain industries are also compiled by financial ratings organizations such as Dun & Bradstreet, Moody's and Standard & Poor's. For example, if you are starting a coffeehouse, you could compare your sales, gross profit ratio, and net income to the averages for the retail sales/coffee industry compiled by Dun & Bradstreet.

It's amazing how many home based and small-business owners don't know if they're making a profit on service, parts or sales. Others don't know whether they're making or losing money on a particular job. The purpose of the accounting and budgetary process is to help you answer these questions and make the right management decisions. You can't plug the leaks in your revenue ship if you don't know where the holes are.

Again, using a program like Quickbooks allows you to see where time is spent for a particular project, what your costs are, how many employees were needed to complete the project and the time it took them (which gives you an idea of salary differential for certain projects).

If for example you are running a consulting business, Quickbooks allows you to track the number of hours you work on a project and what your costs are. In most consulting businesses your time is your valuable commodity. You need to be compensated for the time you spend on a particular project or with a client.

Copyright 2003 DeFiore Enterprises

Interested in having your own successful, home based creative real estate investing business? Chuck and Sue have been helping folks start successful home based businesses for over 19 years, and we can help you too! To see how, visit http://www.homebusinesssolutions.com for the latest FREE tips and tricks, educational products and coaching in creative real estate investing and home based businesses. No time to visit the site? Subscribe to our "how to" Home Business Solutions Digest, it's like having your own personal coach: mailto:subscribeHBS@homebusinesssolutions.com

In The News:

---

1000 Managers Turned Their Plans Into Energy!

I bet you can't tell me how leadership training and... Read More

Firing Someone Without Resentment

Firing, sacking, letting go or terminating people is unpleasant. There... Read More

Tales from the Corporate Frontlines: Training is in the Eye of the Beholder

This article relates to the Training competency, commonly evaluated in... Read More

Poly Bags and Pallet Shrouds - Just Get it Right

For many companies, procuring the right packaging, such as Poly... Read More

Smart Staffing Practices: Don?t Confuse Activity with Results

Does your hiring process consist of proven practices or just... Read More

Protect Your Computer System with a Comprehensive Security Policy

The most difficult part of creating a Security Policy for... Read More

Unveiling the Value of Your Expertise

All of us have knowledge, expertise, and experience that others... Read More

The Supervisors 14 Essential Truths For Communicating With Direct Reports

One amazing, but sadly true, fact of today's advances in... Read More

4 Simple Steps to Successful Delegation

Last month, my featured article was about creating a "Stop... Read More

The Seven Cs: Partnership Danger Signs - Competitive, Not Complementary Action

A series of articles exploring the seven critical areas that... Read More

The Devil We Know

"I'm in an abusive relationship," sighed Andrew. "My bookkeeper annoys... Read More

Increase Productivity: Five Powerful Actions

How can you make the best use of your energy... Read More

How to Coach Your Emplyees and Increase Motivation

It is easy to spot the difference between a work... Read More

Leading Meetings: The Top Three Challenges

What do people really find challenging about leading meetings? Here... Read More

Lone Rangers Suffer without Tonto

A lone ranger is someone who prefers working in solitude... Read More

Character: Is It Necessary In Leadership? (Part One)

We know character when we see it, but what exactly... Read More

Delegating Responsibility

Too many managers waste both time and energy performing tasks... Read More

How To Get What You Really Want

As a small business owner, entrepreneur or independent professional, it's... Read More

Rapport - How to Build it with Your Team

I've often heard managers say - "My door is always... Read More

Offshore This! (Outsourcing Tech Support Overseas)

So I call my telephone company and someone picks up... Read More

Prepare A Winning CV

There is every chance that elements of this article may... Read More

Managers Who Spend PR $$ Wisely

If you are a department, division or subsidiary manager, your... Read More

Real Costs in Distribution and What it Means To Your Company

Ever feel that all the lawyers in thh Country need... Read More

One Crazy Cookie

In order to survive, you have to be happier than... Read More

Status Quo Pep Talks That Can Threaten Your Leadership

Organizations live and die by results. Yet most organizations get... Read More

Managing Yo-Yo Style

Does being managed by others smack more of "Survivor" than... Read More

One Thing You Cant Hide

One of the most important of all motivators at work... Read More

Can Your Business Run Without You?

If you are a business owner or a business owner... Read More

Reprimanding Marginal Employees

THE MARGINAL PERFORMER: Every manager must, from time to time,... Read More

One Bad Apple

One Bad Apple I know what... Read More

Creative and Innovative Culture, Change Management ? Three Easy Tests

Creativity can be defined as problem identification and idea generation... Read More

The Inferno of the Finance Director

Sometimes, I harbour a suspicion that Dante was a Financial... Read More

Hiring a Book Keeping Service

Whether you choose to do your own books and accounting... Read More