How to Develop and Understand and Manage Your Budget
Simply put, a budget is an itemized summary of likely income and expenses for a given period of time. It helps you determine whether you can grab a bite to eat or should head home for a bowl of soup. It is typically created using a spreadsheet, and it provides a concrete, organized and easily understood breakdown of how much money you have coming in and how much you are letting go. It is an invaluable tool to help you prioritize your spending and manage your money – no matter how much or how little you have. Planning and monitoring your budget will help you identify wasteful expenditures, adapt quickly as your financial situation changes, and achieve your financial goals. When you actually see the breakdown of your expenses, you may be surprised by what you find; this process is essential to fully grasping how things can add up. Creating a budget will decrease your stress levels because, with a budget, there are not surprises. With a budget, you don’t have to panic or wonder if you have the money – you already know. When most business owners hear the word “budgeting,” they cringe. Many times, the “budget” ends up collecting dust on some back room shelf, never to be seen again—until your accountant asks to see it. But your budget is more important than you think. It’s critical in helping you and your management team get the profit you want. Everyone deals with a budget at some point in their life. If it’s important to you that your children go on to college, you’ll figure out a way to make your finances work. If it’s a vacation you really want, you’ll find a way to put money aside. When you have a goal in mind, you’re making intentional financial decisions to support that goal. That’s what’s really important: being intentional. Budgeting in your business is the same thing. Start with the end in mind. If you really want that 15% Operating Profit Return on Revenue, craft a budget that will produce that result. Your budget doesn’t need to be complex or complicated, it simply needs to serve you and your business. Invest in a bookkeeping program if you don't already have one. Using a bookkeeping program will keep your budget and line items organized and give you the ability to easily categorize transactions and build reports. You’ll want your accountant nearby to make sure you have all your financial information accurately represented. With your program in place, you’ll find that assets like your income statement, budget and cash plan, will be more consistent and communicate more information about your business. Start with your Profit and Loss and think about what it costs to actually make a sale. How much money are you spending to produce your product? What about the advertising expenses it took to get that sale? When you break down how much you’re spending to sell your product, you’re actually determining the Cost of Goods. You’ll also want to look at your Fixed Expenses, which are the expenses that don’t change each month. The trick is not looking at the numbers at the end of each line item, but instead, looking at the percentage differences. For example, let’s say you made 10 sales in January, the next month you made 12 sales and the following month you made 15 sales. You might not think this is a notable difference, but when you take a look at the percentages, you’ll see that it’s actually a steady trend in your business. From there, you can take a closer look at your budget and craft it with intention. If you have a 5% steady increase in sales, what can you do to make it a 20% increase? With that knowledge in mind, look at your previous budgets or bills. What can you expect for the future? Make a best guess on changes like: • subtle shifts in the market that may affect sales • new marketing campaigns you have planned to increase sales • productive changes in technology • operational adjustments to increase productivity and gross profit margins • fixed expense increases/decreases, etc. This way, you’re creating a “forecast,” using the data you have from the past to monitor changes for the future. (Tip: Depending on your industry, you may want to take into account the seasonal nature of your business and adjust the budget accordingly.) Crafting a meaningful budget is as much an art as it is a science. It takes massaging the numbers, playing with ideas, and always keeping your eye on where you want to take your business as articulated in your Vision Statement. But it’s worth it! It takes a willingness to search out and find the story in the numbers and to ask the tough questions: • What really affects my Gross Profit Margin? • What are possible action steps we can take in bumping up those margins? • How can we increase productivity? • Am I attracting only the most profitable customers? • Am I settling for whoever happens in my front door? • How can I tweak my marketing so that my ideal customer comes running? • Who is accountable for reviewing fixed expenses? • Do you have a system in place to regularly review these expenses? Make plans to attend now!
Speaker(s): Lisa L Rolan
Fee: No Cost