Even through entrepreneurship comes with a great amount of uncertainty in terms of revenues and expenses, a budget is still valuable to an entrepreneur. How can an entrepreneur create a budget that will help them develop their business?
When it comes to budgets, the hard part is not the math. All it takes is some simple addition and subtraction for a month and then multiplying by 12 to calculate the annual budget. The hard part is making decisions regarding the operations for the next year.
The decisions are key and crucial for creating a meaningful budget. These decisions pertain to both income and expenses.
Below are a few examples of key questions to ask when making these decisions:
- Revenue: Should the business expand its inventory? Should the business better regulate prices and discounts in the new year? Could new distribution channels be established?
- Direct Expenses: Can the business reduce its production costs? Is the business working with the right supplier or should the business look for a new one?
- Sales Expenses: Will the business invest in advertising and which types? How much travel is feasible? How will the business market its products or services?
- Administrative Expenses: Can the business reduce the costs of utilities, internet, or phone? Which subscriptions will the business renew versus cancel?
- Personnel Expenses: Will the business hire new employees? Will current employee receive additional training? How can the business structure promotions and bonuses?
- Capacity Expenses: Will the business stay in its current office or move? Will the business add another office location?
- Interest and Depreciation: Will the business get a loan? What technology will the business invest in?
- Result: How will the business invest in the upcoming year?
Once the owner overcomes the emotional barrier of making decisions during the budgeting process, the entrepreneur can begin the five-step budgeting process:
- List Chart of Accounts: Determine your types of revenues and costs.
- Make a Budget Model: After specifying the budget period and the level of detail, modify the budget template.
- Budget Items: Start putting the numbers into the budget template. Outline your likely sales volumes, costs, and total profits.
- Qualify the Budget: Make decisions, determine budget targets, run budget scenarios, do a reality check, and make a cash flow budget.
- External Review: Ask your accountant and advisory board to review the budget.
When starting the budgeting process, take it one step at a time. Sometimes it is helpful to start with last years numbers and tweak them accordingly for the upcoming year. As time progresses, the budget will be more regularly used as a comparison for actual monthly revenues and expenses versus the estimate.
If you would like guidance on controlling your finances and creating a budget, contact us to coordinate your GrowthWheel one-on-one consultation.