101: Budgeting
Unless you’re an accountant, you probably don’t like dealing with numbers. But, if you own your own small business, you need to get familiar with them and quick.
But don’t worry if you failed calculus in high school. Business budgeting doesn’t have to be a complete headache. Here are some tips from SCORE (the Service Corps of Retired Executives) on how to keep your business in the black:
1. Think of a budget as a useful tool — a written financial plan that helps you set goals and measure progress.
2. Start by coming up with a sales revenue target. Make it your best estimate.
3. Based on past experience, estimate your cost of goods sold (e.g., 70 percent of sales) and subtract it from the sales revenue to come up with your estimated gross margin.
4. Forecast variable expenses (items such as travel and commissions that vary according to the level of sales) and fixed expenses (items like taxes and rent that stay the same, regardless of sales). Subtract these expenses from your gross margin to arrive at your estimated net income (before federal taxes).
5. Break your annual budget into quarters and monitor your progress every three months to detect problems and make corrections.
In short, resist the urge to bury your head in the sand when it comes to your business’s finances. The clearer picture you have of your company’s cash flow, the more you’ll be able to plan and take advantage of strategic opportunities down the road.
Source: SCORE, www.score.org.
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