NCET helps you explore business and technology
By Steven Gill
At this time of year many of us make resolutions for the New Year. If you are a small business owner, a resolution you should consider making is to prepare a budget for the upcoming year.
Some small business owners tend to believe only large corporations and businesses need budgeting. Not only is budgeting is critical for your business’s success, it represents your business’s financial goal. Academic studies indicate individuals and businesses that document their goals perform better than those that do not.
A good budgeting process should compel you to think about why your company is in business as well as your key assumptions about your business environment. It’s also important to understand the difference between a forecast and a budget. A forecast is a prediction of the future whereas a budget is a planned outcome.
Budgeting can be done with spreadsheets or specialized software. What works best for your business will vary based upon the complexity of your business and your or your staff’s familiarity with budgeting.
If you have been in business for a while, a starting point for your budget is current and prior year numbers. Most budgets plan revenues and costs on a monthly basis with a total for each quarter and for the year. A number of questions need to be considered in budgeting. Does your business have firm contracts or purchase orders with customers and suppliers? Is your business seasonal? What direction are sales and costs trending and why? Are you introducing new products or services?
It’s also important to know the types of costs incurred in your business. Costs tend to fall into two categories: variable costs and fixed costs. Variable costs are those that change based upon your sales volume. When sales increase so will these costs. Fixed costs are those that stay the same month to month. Knowing the total fixed costs in your business and the relationship between revenues and variable costs, it is possible to calculate a break-event point for your business, which is the sales amount there the company has neither a profit nor a loss.
Based upon the information gathered you can plan your revenues and costs by month. When revenues will not cover the costs for a particular month, look for ways to cut costs or increase revenue.
As part of your planning process, don’t forget to budget your cash flows, which is not the same as profitability. If you identify cash flow issues, your budget will give you time to do something about them.
Lastly throughout the year evaluate your actual performance against your budget. Analyzing these variations will help you set future budgets more accurately and allow you to take action where needed.
Steven Gill is a partner of B2B CFO® and NCET’s VP of Email Administration. NCET is a member-supported non-profit organization that produces educational and networking events to help people explore business and technology.