Are you starting a new business? Are you struggling to make a profit? Then it might be time to look into a creating an operating budget. An operating budget is important as it helps to road map how your business is doing. Some important aspects it helps with are:
- reviewing your business’ performance objectively,
- highlighting areas of your business which will need your attention when it comes to decision making,
- and it forces you to look at the future of your business and how you can improve going forward.
With these reasons for creating an operating budget, what goes into it?
1. Gather the information
If you are starting a new business, then you will need to guess the numbers from the research you have done about your business. If you have been in business for a while you can use the previous year amounts from your accounting software to create your budget.
2. Setup your budget
You can use an excel spreadsheet or an accounting package to setup your budget. There are three sections which are important in your operating budget;
A – Expenses:
Your expenses are everything which you spend money on. It can be money you spend on creating your service or product, or on advertising your brand. These expenses can be divided into fixed expenses and variable expense.
Fixed expenses are costs which you have to spend no matter how many products you sell. These costs include rent, some salaries, liability insurance, fees and other unchangeable costs.
Variable expenses are costs which change according to the number of products you sell. These costs include the cost of the raw materials, the price of advertising, contract wages and the cost of permits.
When you estimate your costs, it is important to overestimate them by at least 20%. Another expense which many small businesses forget to pay is the salary to the owner if they work within the business. This expense is important as it will ensure you are paid for the work you do as an owner and that you won’t be making drawings from your company which are not business related. It is also important to make provision for unexpected fees like legal fees, or fees for consultants or accountants which you may need for some of your projects. You can also look at one-time purchases which you would like to make and include them in your budget so that you can save for them.
B – Income:
Review your previous year’s sales report if you have been in business for a while. By looking at these amounts you can accurately estimate what your sales figures should be for the new year. You should also take into account what is happening in the marketing and how your business will be affected by the new products or services which you will offer.
C – Profit:
When you have calculated your income and expenses, you can subtract them from one another and calculate your estimated profit. The equation for this will be: income – expenses = profit.
Once you have setup your budget, you can look at it on a monthly basis and make adjustments according to how your business is going.
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