A budget, in the context of a business, is basically a financial statement of
your business plan. As such, the budget is a projection of the future activity
of your business, as opposed to a statement of the current status of your
business (i.e., the balance sheet). It looks at where you want your business to
be within a given time frame (usually one, three or five years) and what you
need to achieve in order to get there, and consists of three fundamental
elements: your fixed expenses, your variable expenses, and your required
income/profit.
You are quite familiar with the expenses already. When you budget for your home
and family, you consider the monthly and/or annual expenses that are the same
every month, such as your rent or mortgage payment, you car payments, loan
payments, insurance premiums, and any other fixed amount payments you may have
on a regular basis. You also consider the variable expenses, such as your
monthly utilities, your telephone bill, your grocery bills, seasonal expenses,
and so on.
The biggest difference between the family budget and your business budget is
that, when you pay your household bills, you are working with a fixed and
predictable amount of money (if you are like most wage and salaried workers).
When you prepare a budget for your company, your purpose is not to figure out
how to manage a fixed amount of money. Rather, you want to figure out how much
business you will have to transact in order to meet your own profit goals.
Which brings us to the third element of business budgeting: revenue.
When your originally put together a plan for your business you were undoubtedly
thinking that you would offer a product or service to a given market, that you
would be paid for this product or service, and that you would make a profit
over and above what it cost you to produce whatever it is that you sell. As I
hope you have seen from the preceding chapters, profit occurs only after both
your production materials and your operating expenses have been paid for.
Now, there are a couple of different ways you can think about that. If you are
like most business owners who are not experienced in business management, you
are probably plugging away on a week-to-week, or month-to-month basis. You tend
to think of what you need to do with your business revenues as they come in ?
who needs to get paid, whether you need more production supplies and how much,
and so on.
Compiling a company budget asks you to reverse your thinking. It asks you to
figure out how much money you need in order to run your business, and then how
much revenue you'll have to generate in order to do that, pay yourself a
salary, and still have a bit of profit left over. Once you have figured out
what you want your profit margin to be, you have revenue goals to shoot for and
a direction for your strategic efforts.
In fact, on a certain level, the purpose of a budget is to show you how much
money your business would have to produce in order to make it worth your while
to keep it going.
Of course, that's a rather simplistic way of looking at it. Many of us operate
our small or home-based businesses for reasons other than a desire to make
buckets of money. Not that we'd turn down buckets of money, but those
intangibles might make it difficult to quantify what level of success should be
considered ?worth our while.?
So, let us say, rather, that your budget can give you a realistic idea of the
volume of business you will need to transact in order for your company to be a
financially self-sufficient business entity (i.e., one that pays for itself).
Beyond that, your budget also tells you how much profit you will need to
realize in order to be making the amount of money for yourself that you desire.
So, when you are constructing your budget, you consider how much it cost to
create the business, how much it costs to run it (fixed and variable expenses),
and what a reasonable return on investment would be. Once you have calculated
figured all that out for the time period in question, you will be able to
calculate how much you will need to sell in order to make that much money.
If you have been in business for a couple of years, you will be able to look at
those sales goals and see whether or not they seem reasonable. If you are a
brand-spanking new concern, it will be a little more difficult to tell, but
that doesn't really matter. These are your goals, they give you something to
shoot for and there is nothing inherently wrong with your reach exceeding your
grasp. Whether your are new in business or not, your budget can be a valuable
tool in letting you see how you're doing and how you can do better.
If you compile an annual budget and, once that year is over, you find that you
have fallen short of your goals, you will be able to pull out your monthly
balance sheets and figure out why. With this amount of documentation to direct
you, it should be fairly simple to understand where your money is going and to
figure out where you might be spending too much.
A budget is like a roadmap for your business. Instead of mucking along day by
day and month by month, merely surviving, your budget will show you the big
picture, demanding that you create goals for your business within the context
of that picture. When you use a budget properly, then, you are doing more than
just exercising proper management techniques. You are making a commitment, in
your thinking, to the future of your business. And, in so doing, you make a
commitment to your own future, too.
