January 14, 2010
Would you ever get in a car and drive somewhere without knowing where to go? Not likely – most of us would get directions or know how to get from point A to B. If not, we’d end up lost or run out of gas (i.e. become stranded). The same notion applies to small businesses and the importance of a budget. An operating budget is a simple blueprint that lists expected income and expenses. At a later date, actual transactions can be compared to the budget for analysis and profitability projections. You need an operating budget to stay in business, pure and simple, to build a solid financial foundation. Develop it at startup as part of your short-range and long-range plan.
Why You Need a Budget:
- Plan for a profit.
- Annual & monthly picture of income and expenses.
- Actionable info to complete loan/financing applications.
- Preclude problems and plan for success.
- Plan ahead for shortfalls, slow downs, and busy periods.
- Plan finance or purchase of capital expenditures.
Types of budgets for small businesses include:
- Cash budget, which tracks cash flow.
- Expense budget, which allows you to compare actual + budgeted expenses.
- Operating budget; focus on bottom-line issues. It’s “an itemized statement of income, expenses, debt service and cash flow during a future period.
This document is critical – as you will use it to make sure you have the money to operate your business. It helps every startup determine the amount of resources needed to get product out the door or service to clients.
Five parts of an operating budget:
- Sales Budget
- Production Budget
- Operating Expenses Budget
- Budgeted Income Statement
- Cash Budget
I am going to focus on a 12-month budget. It’s comprised of the following components:
This is a projection of what you can sell. Ideally, it is the budget upon which all other planning is based. Test marketing, research, case studies or polls from other businesses can help you determine your projections. Study the demand for your product and the market served. The accuracy of these figures will make or break you. If you overestimate you’re stuck with excess inventory which is costly. If you underestimate you slow down operations & affect client service.
The production budget helps you asses the cost of making the product or providing a service (e.g. cost of raw materials, tools, labor, and overhead). Overhead is comprised of “expenses + costs not directly associated with production or sale of goods & services. (e.g. office, rent, utilities, insurance, advertising, accounting and legal expenses). Try to be as accurate as possible or you can lose money.
Operating Expense Budget
An operating expenses budget is really a part of the production budget. It covers regular business expenses. Usually the operating expenses budget is divided into the various areas of doing business, such as advertising, human resources, research, and admin.
Income Statement (Budgeted)
The income statement is where the preceding budgets are assembled so you can compare expenses and income. The idea is not to spend more than you make. It should cover a specific period – daily, monthly and quarterly are my preferences. It’s an excellent planning tool.
Pretty simple — the difference between your receipts (money coming in via sales) and your expenses is “cash.” It’s the difference between breaking even and making a profit.
When I first started my company I created one from scratch – these days I leave it to the pros. I am particularly fond of iCashbook – it’s simple and fully automated with a clean user interface & flexible pricing; New Zealand based app but great tool to illustrate budget needs for various industries (Try the Free Plan). Take a peek at additional templates/software below:
Excel Budget Template
Microsoft Office Accounting Express (Free)
This article is not meant as financial advice. Consult a professional. Consider consulting a trusted CPA, financial advisor or banker to help you create your budget. Photo Credits.