How Budgets Work for Businesses – Annapolis Estate Planning

You are so good at what you do that you recently launched a new business. Maybe it’s your retirement dream business? If your skills at bookkeeping and budgeting are nowhere near as good as your new business skill, spend some time learning how to create a business budget.

The first rule of any budget, whether for your home or a new business, is to estimate and match your expenses to revenue. You’ll need to know how much you need to earn to keep your operation going, and what numbers will indicate that it’s time to expand. Without a budget based on real numbers, and not just wishes, says Investopedia in the article “6 steps to a better business budget,” there’s no way to know whether you are succeeding or losing ground.

Every business owner will have a somewhat different process, situation or way of budgeting. However, every business owner should consider the mortgage, utility bills, payroll expenses, cost of goods sold, expenses (raw materials), interest, tax payments, and any other costs specifically associated with the business when setting up or taking over an existing business.

A business that’s already up and running can make assumptions of future revenue based on recent trends in the business. If it’s a startup, you'll have to make assumptions based on your geographic area, hours of operation and research of other local businesses.

After you have this information, you should then match the business's revenue with expenses. Calculate what an average weekly expense would be for overhead, utilities, labor, raw materials, etc. Based on this information, you may then be able to estimate whether you'll have enough extra money to expand the business, or to save. Similarly, owners may see that to have three employees instead of two, they’ll have to generate more in revenue each week.

Use these six tips to help you put together a small business budget:

1. Industry Standards. Conduct some research for data about the industry, speak with local business owners, visit the local library, and look at the IRS web site to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings. Small businesses can be extremely volatile, since they are more susceptible to industry downturns than larger, more diversified competitors.
2. Create a Spreadsheet. Prior to buying or opening a business, make a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. Talk with any suppliers you'd have to work with before you continue. Do the same thing for rent, taxes, insurance, etc.
3. Add in Some Breathing Room. While you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are never set in stone. Factor in some slack and make certain that you have more than enough money saved or coming in, prior to expansion or adding new employees.
4. Cost-cutting. Review items that can largely be controlled. You should also wait to make purchases until the start of a new billing cycle, or take full advantage of payment terms offered by suppliers and creditors. A little maneuvering could give a business owner some much needed breathing and expansion room.
5. Review the Business. Although many firms draft an annual budget, small business owners should do so this more often. It’s not uncommon for small business owners to plan only a month or two ahead, because business can be quite volatile and unexpected expenses can ruin revenue assumptions.
6. Keep an Eye Out for Less Expensive Services and Suppliers. Don't be afraid to shop around for new suppliers or to save money on other services being used by your business.

You might hear business owners using different phrases to describe their budgeting, including matching revenues and forecasting. The basic concept is similar to a household budget in that you want to know what’s coming in, what’s going out (and where’s it going), if enough funds are coming in to cover your costs and if there’s enough to pay yourself. Just like at home, you’ll benefit from having an emergency fund to help you through the invariable ups and downs of growing a new business.

Reference: Investopedia (June 26, 2018) “6 steps to a better business budget”

Holden & Campbell, LLC – Annapolis Estate Planning