Today I want to talk to you about something no one wants to mention . . .
The one thing almost every business owner cowers away from in fear and sweeps under the rug
The Basics of Business Budgeting
Now, before you satisfy your fight-or-flight reaction and click off the page . . .
You should know that creating a budget is one of the single most important things you can do for the success of your business long term.
And here’s the good news:
It doesn’t have to be as scary as it sounds.
In fact, most people get overwhelmed by budgeting simply because they’ve got the wrong idea about what they need to do. Many business owners think they’ll have to examine the business’s financial health with the precision of a surgeon.
But that’s not the goal of creating a business budget.
Instead, consider it a roadmap filled with your most educated assumptions, so you can make the smartest business decisions.
And always keep this in mind as you put your budget together:
There are only two ways to increase your bottom line: you need to make more money, or you need to spend less of it.
Let’s take a look at how to draft a budget that’ll unveil exactly what levers you can pull – and when.
Creating a Business Budget for Profit
Include High-Level Revenue and Expenses
When making your budget, include a general overview of your revenue and expenses. Don’t outline every piece of inventory, that’s not important right now.
All too often I see my clients get bogged down by the details. Even worse, they can get hung up on the exceptions rather than the rule, racking their brains for ways to include those once-in-a-blue-moon events into their budgets.
Special discounts or an end-of-the-year sale aren’t common enough to factor into a budget.
Remember, the simpler you keep your budget, the easier it will be to leverage it to your advantage. These are guidelines – not a by-the-book instruction manual.
Factoring in Cost of Goods Sold (COGS)
Once you’ve got your revenue projections, you’ll want to move on to budgeting for your costs of goods sold.
For this step, take into account known fixed costs or variable costs like product costs, printing costs, shipping costs, or any additional expenses related to the product or service you’re selling.
Make sure to follow a conservative approach here, because it’s always better to account for higher expenses and be left pleasantly surprised than it is to underestimate what you’ll have to pay.
And as with your revenue, don’t account for those exceptional circumstances. The one time your wholesaler gave you a discount on inventory isn’t solid enough evidence it belongs in a forecast for the coming year.
Accounting for Operating Expenses (OPEX)
Finally, you’ll need to include your operating expenses in your budget. These are your standard recurring payments that occur regardless of whether you make a sale.
Think of things like – rent, salaries, insurance, and any fixed expenses or variable expenses you have to pay to keep your business running.
A good rule of thumb?
Start by listing out your non-negotiables and then move on to your nice-to-haves.
Paying for the storefront is necessary for your business; getting monthly refills for the five-figure coffee machine isn’t. The more honest you are about what’s a basic necessity, the better off your business will be.
Final Steps for Your Best Budget Yet
Once you’ve completed the above steps, you’re bound to have a pretty good idea of where your finances will settle by year’s end.
Now it’s time for everyone’s favorite calculation . . . How much profit are you walking away with?
You can calculate your profit by subtracting both COGS and OPEX from your projected revenue.
After you’ve got this in place, you’ll want to make any necessary adjustments.
That means two things:
First, ask yourself: does my budget cover all my basic financial obligations?
Second, are you operating in the black?
If your current budget is reflecting a business that’s operating in the red, your only option is to try and sell more. And relying on this alone comes with a mountain of risk.
Your optimal budget will reflect a profit, provide some cushion for emergency circumstances, and make room for you to invest in the best opportunities for your business.
Once you understand what’s driving your budget and where you can make adjustments, you’ll have much greater flexibility as the roadmap begins to manifest.
And remember, if the idea of putting this all together seems like a nightmare waiting to happen, help is only a click away.
Hire an expert to take care of your budgeting and set you up with a solid foundation scalable success.