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Drawing Up A Company Budget Essay

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    Set your goal.Defining a goal makes it easier to stick to your budget, and gives you a way of measuring your success or failure in meeting it. Why are you going on a budget? Maybe you want to start saving for college, or maybe you want to get out of debt. Whatever the case, make sure you set a SMARTER goal (a goal that is Specific, Measurable, Achievable, Relevant, Time-bound, Evaluated, and Reviewed regularly) to improve your chances at success from the beginning.

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    Calculate how much money you earn after taxes in a typical month. Begin by figuring out exactly what you bring home each month--your net income after taxes and other deductions, which includes your paycheck, tips, scholarships, legal entitlements like child support, alimony, government subsidies, and any other money that comes into your wallet or bank account. This is your income.

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    Calculate your expenses. Save all of your receipts for a couple weeks, or a month. Knowing your monthly expenditure on groceries or gas, for example, makes the next step much easier. If you want to start writing your budget today but don't have receipts, it is possible, just slightly more difficult.
    • Fixed Expenses are expenses that remain relatively stable from one month to the next. These will include items such as your rent, mortgage payment, car payment, loan payments, utilities, and insurance. A fixed expense that many people overlook is savings. You must pay yourself--in the form of your savings account--before you pay anyone else. This way you can develop a financial "padding" to protect yourself during times of financial hardship. 
    • Variable Expenses are items that fluctuate from one month to the next such as the costs associated with dining out, entertainment, clothing, groceries, personal care products, and vacations. This will be the first place to make cut-backs if you are spending beyond your means.
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    Divide your budget into basic categories. For example: "Housing," "Food," "Auto," "Entertainment," "Savings," "Clothing," "Medical," and "Miscellaneous." You could also organize your expenses into needs - such as your loan and electricity - and wants - such as clothing and entertainment.

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    List all your spending for each category. Let's take "Auto" as an example, and say that each month you have a car payment of $300 and a $100 insurance bill. In addition, every month you spend an average of $250 on fuel, $50 on maintenance, and $10 on taxes and fees, such as registration. So, in the "Auto" category, your total budget for the month would need to be at least $710 per month. If, for some reason, you don't know the exact amounts you spend in a category, make good estimates. The more accurate you are, the more likely you are to keep to your budget plan.

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    Add up all your spending by categories. This should show your total monthly spending, or how much money you take out of your wallet or bank account each month. Compare it to your income.

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    Decide on a method to keep track of your budget. You can use a good old-fashioned ledger book, available from a general shopping center for about $5. However, many people prefer to use computer programs like Quicken, Microsoft Money, or Excel.

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    Set up your ledger. If you chose to get the ledger book, leave the first five odd pages blank, we'll come back to them later. Divide the rest of the ledger into as many sections as you have main categories. Put each main category on the first page of each section. This will give you room for lots of entries in each category. Multiple transaction categories, like "Food," are going to need lots of pages.

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    Show a "deposit" in each category at the start of each period, then show all the expenditures from that category throughout the period. So, for "Auto" you would start off with $710 for the month, then show several expenditures for "fuel", one expenditure for "car payment", and maybe one expenditure for "insurance" (depending on whether you pay for insurance monthly).

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    Use that first section of the ledger book which we saved earlier to record income and show the budget being subtracted from it each period. For instance, If you get paid every other Friday, there should be corresponding entries in the income section showing income deposits at the same interval (every other Friday). Thus, if your monthly budget is $2,800 and gets subtracted on the 1st and 15th of the month, on each 1st and 15th the income sections should show a total deposit of $1,400 and, for the same period, your "Auto" section should show a deposit of $355 from which you can subtract as you spend from your budget.

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    Make adjustments. In order to devise a balanced budget and meet your goal, your income must be greater than or equal to your expenses. To find out if your budget is balanced, you need to subtract your fixed and variable expenses from your income.
    • The Balanced Budget. If your income is the same as your expenses, or, better yet, greater than your expenses, you have devised a fully-functioning working budget. Though it may be tempting to spend whatever "extra" funds you have, your next step ought to be to make sure that you put your leftover funds to work for you. There is no such thing as "money to spare," especially if you have debt or unrealized savings goals. Instead of adding your surplus to the "Fun" budget, always use it pay down your debt and add to your savings. 
    • The Unbalanced Budget. If you are spending more than you earn or receive, you have some serious work to do to balance your budget. Begin by examining and adjusting your variable expenses. You will need to pare back on this spending first by cutting back on luxury expenses, like restaurants, entertainment, and other non-necessities (e.g., brand-name products). If your budget is still out of whack, try cutting back on fixed expenses too. Perhaps you can rent a room or take on a roommate to share your bills. Or, maybe, you need to opt for a cheaper or more fuel-efficient car. Conversely, you can also try to increase your income by taking on part-time labor, working overtime (if it is available), switching jobs, or starting a home-based business.
    • Evaluate continually. Your financial situation will change; therefore, it is necessary to make alterations to your budget from time to time. If you pay off a debt, get a raise, or make some other life change, rework your budget using your new information. And remember, debt repayment, savings, and financial security must always your number one priorities.
  • It's a basic tenet of business - before you can make money you have to figure out how to spend it. Drafting a budget is a key way to help you turn your dreams for business success into reality. Using this vital tool, you can track cash on hand, business expenses, and now much revenue you need to keep your business growing -- or at least afloat. By committing these numbers to paper, your chances of succeeding with your business are helped by anticipating future needs, spending, profits and cash flow. It also may let you spot problems before they mushroom, so that you can switch gears.

    "It's like a roadmap for your company," says Victor Butcher, of Butcher Financial Services in Memphis, Tenn., a former president of the Tennessee Society of Certified Public Accountants' Memphis Chapter who advises small businesses. "You need the roadmap to understand where you're going with your business."

    Conversely, if you don't have the discipline to sit down and assemble a business budget, you may not have insight into how your business is performing from year to year, whether there are cuts you can make to improve performance and whether you have the needed funds to purchase new equipment -- be it computers, trucks, machinery, or a new factory. "It's like being in a car without a map or GPS system," Butcher says. "You hope going in the right direction, but you don't know."

    The following pages will detail why your business needs a budget, what components you should include in a budget, and how to get started drafting a budget, and how to use the budget to better your business performance.

    Why Your Business Needs a Budget

    The bottom line on why to draft a budget for your business is that it will help you figure our how much money you have, how much you need to spend, and how much you need to bring in to meet business goals. But there are other reasons, too. Bankers and other financiers may want to see a budget when you ask for a loan. Employees should also be privy to the budget so that they understand where the business is going and are motivated to work harder. "It would be stupid not to share this with employees. Everybody should know what the goal of the company is. It's a group goal," Butcher says. "Don't expect your staff to meet your goals if they don't know what they are."

    Budgets can also help you minimize risk to your business. A budget should be created before you sign a new lease or invest in new machinery or equipment. It's better to find out that you can't afford new office space before you commit to spending a certain amount of money every month. According to the U.S. Small Business Administration, a budget can be used to indicate some of the following:

    • The funds needed for labor and/or materials.

    • For a new business, total start-up costs.

    • Your costs of operations.

    • The revenues necessary to support the business.

    • A realistic estimate of expected profits.

    You can use this information to adjust your plans or expectations going forward. A 12-month budget can be updated with actual expenditures and revenues each month so that you know you're on target. If you're missing the targets set out in your budget, you can use the budget to troubleshoot by figuring out how you can reduce expenses like labor or new computers, increase sales by more aggressive marketing, or lowering your profit expectations.

    Components of a Budget

    A budget should include your revenues, your costs, and -- most importantly – your profits or cash flow so that you can figure out whether you have any money left over for capital improvements or capital expenses. A budget should be tabulated at least yearly. Most yearly budgets are also divided up into 12 months, with blank columns next to your estimates to fill in with your actual results as the year progresses. You may want to consult an accountant in preparing a budget, but it also may be something you can do yourself with small business financial software and/or some of the free budget worksheets and templates available online (see Recommended Resources below.)

    Here is how the SBA defines the basic budgeting components:

    Sales and other revenues - These figures are a budget's "cornerstone." Try to make these estimates as accurate as possible, but err on the side of being conservative if you have to. "Everyone would like to see sales double each year but the odds of that happening are very unlikely," Butcher says. The best basis for your projected sales revenues are last year's actual sales figures. If you're just starting out, hopefully you have done your research by asking other business people in the same field as you, using knowledge of the field you had at a previous job, and/or doing market research.

    Total costs and expenses - Now that you have your sales estimates done, you can come up with figures for how much it will cost your business to earn those revenues. These can be tricky because sometimes they will vary because of inflation, price increases, and other factors. Costs can be divided into categories: fixed, variable, and semi-variable.

    • Fixed costs are those expenses that remain the same, whether or not your sales rise or fall. Some examples include rent, leased furniture, and insurance.

    • Variable costs correlate with sales volumes. These include the cost of raw materials you need to make products, inventory, and freight.

    • Semi-variable costs are fixed costs that can be variable when influenced by volume of business. These can include salaries, telecommunications, and advertising.

    Profits - Let's face it: you're in business to make a profit on your investment and work. You estimate this figure by subtracting your costs from your revenues. The SBA advises to check with trade associations, accountants, or bankers to make sure that you're getting an appropriate profit from your business. Once you have profit estimates, you can also start to plan for whether you can purchase new equipment, move to a bigger location, add staff, or give your employees bonuses or raises. You can also troubleshoot your projected costs and see where you can cut if your profit projections aren't up to snuff.

    The budget should operate according to basic mathematical equations -- either "sales = total cost + profit" or "sales - total cost = profit."

    How to Draft a Business Budget

    Drafting a budget is easiest if you wrote one the previous year. Those projections, coupled with the actual income and expense figures you realized, would form the basis of your estimates for the coming year. But if you're reading this article, the odds are that you've never written a budget for your business before. In that case, read on.

    Target your sales and profits. Start out by developing a target for your sales revenues, advises SCORE, a non-profit group with 370 chapters that is dedicated to helping entrepreneurs and small businesses form, grow and succeed. For a startup business, begin by estimating what type of realistic profit you'd like to see in the coming year. If you have been in business for a while, take your company's most recent financial statements -- be they generated by a ledger or a computer software program -- and use those as the basis for developing your sales and profit targets. The reason you start with sales and/or profits is because this information will drive the rest of your estimates for costs, expenses, and capital expenditures. Take into considering factors that might affect your sales numbers -- such as the economy or the loss of a major customer – but don't worry too much because the basic tenet of budgeting is that the figures will never turn out to be exactly right.

    Calculate operating expenses. A good place to start, once again, is those financial statements. These statements should include an itemized list of the fixed and variable expenses you incurred during the year, including salaries and wages, rent, postage, research, travel, utilities, taxes, etc. If you're just starting out, you're going to have to brainstorm to make sure you factor in all the costs you will incur.

    Figure out gross profit margin. Again, this is much easier if you've been in business for a while. In that case, estimate the cost of your goods sold (beginning inventory, goods purchased or manufactured, shipping charges, etc.) and subtract that from your overall sales revenue, SCORE advises.

    Take time to readjust figures. Given the estimations for sales and expenses, you most likely will want to go back and readjust your estimates to reach your profit targets. This may mean you purchase fewer new supplies in the coming year or you need to add two new employees. Factor in these adjusted costs and or savings and run the numbers again. You may need to bite the bullet and go to an accountant or business consultant for help with your budget figures. Either way, remember that it's important to use realistic figures so that your budget can help you guide your business. Remember that budgeting is not an exact science. "A budget works on common sense," Butcher says. "If you made $100,000 last year in revenue, common sense indicates you won't make a million next year. Your best off estimating in the range of $80,000 to $120,000." But be prepared to make adjustments to your budget as the year progresses. You may have set your sales figures too high when the economic slump hits your business. Or, conversely, you may land a client that doubles your business.

    Recommended Resources: 

    Microsoft offers a series of free downloadable budget templates. These include a rolling budget for small business, an expense budget, a website budget tool, and an annual operating budget for a services business.

    BetterBudgeting offers a free budgeting worksheet.

    Docstoc is a marketplace that lets you find and share professional documents. The website has an assortment of free printable budget worksheets to try.

    Winsmark Business Solutions has a free downloadable cash flow budget worksheet.

    Business Owners Idea Café has an all-in-one first year business budget calculator that lets you plug in your startup, monthly, and personal expenses in your first year in business.

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