Written by: Jill Sorensen, Accountant
Last week, my husband and I took a vacation. During that time, we relied heavily on the use of Google Maps in order to get from one place to another. The thing is, we knew where we wanted to go, but since neither of us had driven there before, we needed some directions on how to get us to our destination. The directions provided helped us arrive at our destination due to a wonderful set of step by step directions that helped us find our way quickly, allowing us maximum time to enjoy ourselves.
The business world also has a GPS that helps us reach our destination, or achieve our goals. The GPS is called a budget. You decide where you want to go, and your budget gives you step by step instructions on how to get there. In order to better understand budgets, let’s go over some basic ideas of what a budget is, why your business should use one, and the basics of making a budget.
First, what exactly is a budget? A budget is simply a business plan for your money. Just like me on my vacation, you pick where you want your company to go, then create a step by step plan on how to get there. Most budgets are monthly, though some are annual.
Second, why use a budget? Have you ever heard the phrase “If you fail to plan, you plan to fail?” Imagine, if you will, our trip without our GPS. With few road signs and no knowledge of local landmarks, we could have ended up on the opposite side of the country from our intended destination. Essentially, our vacation could have been a complete failure. Similarly, your business can end up going the opposite directions from your intended goals without a specific budget of step by step directions on how to reach them.
Now that we know what a budget is, and why we need one, let’s go over a few details of how to make a budget. There are many templates and some software that can help you do this, but these are the essential steps.
- List all sources of income for your business. It is a good idea to do this on a monthly basis. Such sources may include product sales, rental income, and/or service income.
- List all your overhead, or fixed, expenses. These are things you would pay for monthly, such as rent, salaries, utilities, insurance, and subscriptions. Anything that you would pay the same price for each month.
- List all of your variable expenses-things that may change in price, or you don’t buy frequently. Some examples are: commissions, advertising costs, contractor wages, and transportation or travel costs.
- List all of your one-time purchases. Keep in mind that these will change month-to-month. So it could be something like a new table for the office or a replacement computer.
- Determine your projected profit. Do the math and subtract your expenses from your income. This helps you see how much money you have left over or if your expenses need to be adjusted.
- Record income and expenses as they occur, and make necessary adjustments as needed. Remember, the budget can be flexible. So don’t hesitate to update your plan in the middle of the month if you need to. We all know things come up from time to time.
The last thing to do now, is reap the benefits of your budget. There are so many, but a few specific benefits include: knowing how much cash you have on hand, maintaining control over your money, informed decision making, advance planning for big purchases, minimization of risks, and early identification of destructive spending. Further, with such detailed guidance for your business, you too can feel free to “enjoy the ride” knowing that you have step-by-step directions to help you obtain your business goals.