Note: This is a guest post by Brad Farris, a small business advisor at Anchor Advisors in Chicago. We invited him here to talk about how to set a business budget. For many of our clients that secure small business loans, the next step is to make sure they don’t spend it all in one place. That first step might be to set an efficient budget. Let us know what you think of Brad’s advice:
If you have a business, you need a budget. A business without a budget won’t work — at least not for long. Here are 8 steps to building a budget that can grow your business:
The best prediction of future performance is past performance. So, build your budget based on historical performance. Make sure the data is as clean as it can be so that it makes the budget as accurate as possible.
Open QuickBooks and find where payments were made twice in a month, and not at all in the next month. Get rid of expense categories that you don’t use, or haven’t used, in a while.
The more accurate and complete your historical data is, the better your budget will be. Also, import actual data from QuickBooks every month into your budget to be able to monitor your progress. That process will go more smoothly if you have cleaned up your QuickBooks file.
Base your future expenses on your past expenses. Use the same account and expense category structure you have in QuickBooks so you can export actual data for monitoring progress. Exporting that data from QuickBooks is the quickest way to get started. To do that:
Go to Reports > Company & Financial > Profit & Loss Std and set the dates for the period you want to export, then export to Excel. Bam! You just started your budget.
Since salaries are the largest expense for most small businesses, you’ll want to forecast it in detail. Make a list of your employees and their pay, and forecast that out month-by-month over the next year. When you look at each person, consider whether they are compensated up to market rates. What kind of raise might you give them this year (and when)? Building a detailed roster helps you forecast this important expense accurately.
Your sales forecast drives every decision in your budget, so it’s important to create it as accurately and thoughtfully as possible. The sales forecast will start with estimating current and past customer sales, line by line. Then, you forecast sales to new customers by forecasting typical items. This data will form the milestones to measure your progress through the year.
Now that you know your revenue, what will your expenses be? Each expense line has something that drives it. You don’t just spend money, you spend it because you need something. So what need is driving that expense?
Figuring out the expense driver helps create a formula for each expense line, which accurately forecasts expenses and keeps the whole budget interactive. That way, when you change your sales or staffing assumptions, those changes are reflected in the budget.
Now that you have a revenue and expense forecast, you can hook it all together and see what the profit looks like.
Do you like that number? Does that provide enough for you to reach your goals? If not, what do you want to change, sell more of, or spend less on? Make the adjustments you need in order to get your ideal number.
If you’ve made adjustments to reach a profit number that matches your goal, make sure you know how to make those numbers a reality. If you need to cut expenses, where will you spend less? If you raised sales, how are you going to find the leads, or close the sales, in order to stay on track with that goal?
Once you’ve got all that down, you’ve got your final budget. But the most important thing is to USE your budget to monitor your performance and make decisions, which is the next step.
Each month as you finish up your accounting, you need to export your actual results and compare them to your budget. Once you do that, you can analyze how you are doing and understand what changes need to be made to stay on track. This is where your budget really starts to pay for itself.
To help out with this, at EnMast.com you can download our pre-made, Excel small business budget template, and our Ebook with videos that help you through each step. This is going to be easy, and you will know so much more about your business with a solid budget.
About the Author
Brad Farris has spent the last 10 years as a Small Business Advisor at Anchor Advisors in Chicago. He also shares Small Business Tools and Templates at EnMast.com, a small business owner’s community.