New Year, New Budget, New Game Plan
by Anneke Stender – VP, Family CFO
If you haven’t made a 2012 budget for your business, you’re about two months behind schedule. Not to worry though, I’ve come up with an easy-to-follow guide for creating your annual business budget. If you’re the type of person who’s thinking “I don’t have the time for this” or “budgets are only for start-ups”, you’re probably the person who needs a budget the most.
Whether your 2011 budget was another untouched icon on your desktop, a useless spreadsheet with rough estimates, or still on your 2011 to do list, you’ll have a solid budget started for 2012 after reading this guide.
Let’s plan a simple operating budget. This will match your revenues to expenses, and show your net sales and profit/loss for the a 12 month period.
1. Choose Your Budgeting Tool: The amount of technology at our disposal makes creating a budget a lot easier than you think. If you have basic accounting software like QuickBooks, I would advise using that over excel. It has a friendly user interface and you’ll be able to track your finances against your budget very easily. If you’re in the start-up stages or a fan of excel there are some great templates you can download here: http://office.microsoft.com/en-us/templates/CL102207090.aspx to get you started.
2. Estimate Revenues: At this step you will predict future sales based on past sales performance and an analysis of expected market conditions, as well as internal sales and marketing results.
3. Estimate Expenses: After you figure out how much you expect to make for the year, you can determine how much you can spend. You will usually base these numbers off an average of the prior year, adjusted for any upcoming new expenses and price increases.
4. Estimate Cash Flow: In order to prepare for the inevitable cash flow peaks and troughs that all businesses go through, you will need to provide a guide for tracking which areas of the business are most profitable, and show which creditors are owed various amounts of the company’s future profits and at what times.
5. Review and Modify: Research your industry’s budget and ratio averages to give you some guidelines – here are some helpful tools to see industry benchmarks http://www.bizstats.com/.
6. Forecast: There are plenty of tools online to help you forecast and build models for key areas of your business. Once you have your basics in place, it’s time to dig deeper into sales forecasts, capital budget models, depreciation schedules, profit/loss projections, and growth models. Here is a toolbox of models and templates that will get you started: http://www.inc.com/guides/2010/09/12-best-tools-for-budgeting.html
Keep in mind that simply having a budget does not guarantee success. Here are a few more tips to keep in mind while making your game plan.
• Building a cash flow budget is just as important as an operating budget. Many business owners make the mistake of thinking profitability=success. You can be showing profits and have cash flow problems simultaneously. The timing of when you make payments and receive payments can greatly affect your ability to grow.
• Plan for best case, worst case, and middle of the road scenarios. If you’re prepared for all three, you won’t be caught with your guard down when you’re 30% over budget or (hopefully) sitting on more cash than originally expected.