Budgeting For Your Business

One of the most important skills of the entrepreneur is the ability to prepare budgets and accurate financial forecasts for their business. Your ability to set financial goals for sales, expenses, and profits is a true measure of your ability to succeed in business.

Visual Description

The purpose of the budget is to give you a visual description of the expected financial results of your business activities. The budget should cover 12-24 months of business operations. You can start with the paper spreadsheets that you fill out with a pencil. You can use computer programs like Excel that enable you to change numbers quickly. You should work out a complete budget before beginning business operations. You should review, revise and update your budgets for the next twelve months, each month.

Four Major Numbers

A basic business budget contains four major numbers: Projected sales and revenue; projected total costs of achieving that level of sales and revenue; the profit or loss from operations based on the two numbers above; the cumulative total of profits and losses on a month to month basis.

Top Line

The first and most important number is the top line-the estimated sales for the month. This number will be the result of a complete analysis of your marketing and sales activities. Your ability to project this number with accuracy is a key measure of your talent as a business person. You should have three different numbers for this first line: High sales estimate; medium sales estimate; low sales estimate. The key rule is that your business should be profitable even if your low sales estimate turns out to be incorrect. Your sales and revenue projections should be based on experience, market analysis and research.

All Costs

In the second part of your budget, you include all the costs of operation involved in producing and delivering the product or service to the customer. Include all the costs of purchasing or producing the product or service. Include all costs of sales and marketing and operation of your business. Include all fixed, variable and semi-variable costs of business operation. Your final number should include 100% of all out-of-pocket expenses necessary to achieve your estimated sales revenues.


 

Total Profit or Loss

The third major number is the total profit or loss from operation for that month. There will sometimes be months of the year where your business loses money. In a new business start-up, the first few months will usually show losses. It is the general sales and profit trends that are most important.

Cumulative Profits or Losses

The final number is the cumulative profits or losses of the company over a period of months. Profits and losses are added together each month to get a total. These totals tell you when your business will break even and begin earning a profit. The total losses will tell you how much money you will have to borrow or provide to the business before it is profitable. You will require this business budget to borrow money from any bank or lending institution. An accurate business budget tells you, and others, you should create a budget for each one.

Action Exercises

Calculate the high, medium and low projections for sales for your business for the next twelve months

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