This is the last in this series of articles about how to prepare your business budget for 2017 that began with Understanding Business Growth Strategy. Your business budget is one of your most important financial statements, and should be prepared with care. If planned well, it will enable you to both forecast and monitor the financial impact of your business decisions and operational plans.
I remember the first time I sat down to prepare a business budget as a new CEO. The quality of the financial information I inherited was poor, and didn’t contain the level of detail I needed to understand the true costs of running our services. I crossed my fingers and hoped what I’d put together was good enough. It wasn’t brilliant, but my first business budget provided me with a good enough roadmap. The next year when I came to put together my second business budget, the task was made much easier because I had 12 month’s of accurate historical data to work with.
What Is A Business Budget?
A business budget, sometimes called a profit and loss budget, is a summary of expected income and expenses, broken down on a month by month basis over a 12-month period. Normally, it’s prepared annually, although the period may be shorter or longer, depending on the purpose of your budget. In a nutshell, income and expense information is set against the business operating plans for the specified budget period.
Calculate your projected expenses and profits. If you’re a start-up, you’ll need to estimate these costs. If you’re an established business, use your historical data which you’ll find on your Profit and Loss reports. I focus on the previous 12 months, but I also like to look back at the previous two years to see whether there are any trends I should take into account.
Drill down into the fixed and variable costs of running your business. Separate out your sales and marketing related expenses. I’ll explain why shortly.
First determine the fixed expenses for operating your business. Fixed expenses don’t fluctuate in response to changes in your sales volume e.g. rent and insurance.
Enter these figures onto your spreadsheet or chosen accounting software. Personally I prefer to work on a spreadsheet as it’s far easier to make changes. Only once my budget is complete do I enter it on to my accounting software.
(Note that if you’re setting up accounting software for the first time, you’ll be asked to make an entry for each expense account into the system. Having these in a neat list will make it much easier for you to generate business reports. Include expenses such as rent, business loan repayments, and insurance payments to your list of monthly fixed expenses).
Second, figure out your variable expenses. Variable expenses change depending on sales volume, and include items such as employee wages, sales commissions, business supplies, marketing expenses and utility bills which may vary from month to month.
I like to split sales and marketing expenses (and research and development costs if relevant) from my other variable costs.
Next enter the figures from your sales forecast along with any other expected income. Now see what happens to the bottom line. That’s your net profit, sometimes called net income. What’s your net profit percentage?
If you haven’t done so already, create a profit goal for your business budget. This will help you determine the minimum level of monthly profits necessary for your business to survive. Equally important, your profit goal will tell you how well your business is doing. Increasing net profit for your business should be your ultimate financial goal.
Make sure you’re spending money in the right areas of your business. Your aim should be to keep direct costs as low as possible in order to generate as much gross profit as possible. It’s that gross profit which will pay your fixed and variable costs, and generate net profits, your ultimate business goal.
Remember my mantra that your retail price must be a minimum of COGS plus 45% of COGS to generate a minimum gross margin of 30%. (COGS is 70% of your revenue). This is the lowest gross profit can be for a business to be viable. In my view this is far too low, so I keep COGS to less 50% or less of revenue. This is because I want a decent sales and marketing budget, and to optimise net profits.
When it comes to allocating a sales and marketing budget, the minimum I recommend this to be is 8% of revenue. This will give you some business growth, but nothing spectacular. Lower than 8% of revenue and you will struggle to promote your brand and grow your business. As a rule of thumb, start-ups and businesses going for fast growth should allocate 20% or more of their revenue to sales and marketing activities.
Monitor your business budget on a monthly basis by reviewing your Profit and Loss Report. This will tell you how well your business is performing against your budget. Adjust your spending habits based on how much money you’ve made for the month.
Take care not to make two of the commonest mistakes in business. Overestimating sales and underestimating running costs. Sales (and collection) drive cash flow. If your forecast is overly optimistic, your cash flow will be off, and you risk hitting a cash crunch. Don’t make the mistake of over-inflating your sales forecast by increasing sales expectations to meet a budget shortfall.
Join The Conversation
Question: Have you prepared your 2017 business budget? What will you do differently as compared to last year? I love reading your feedback so please do reply using the comments box below.
Explore These Additional Resources
Did you miss any of the other articles in this series?
- Understanding Business Growth Strategy
- How To Prepare A Sales Forecast – Part 1
- How To Prepare A Sales Forecast – Part 2
- Why Hitting Breakeven Point Is Critical To Business Success
- 5 Strategies For Hitting Breakeven Point
- Marketing In A Weak Economy
Work With Me
I’m Denyse Whillier, a London based business coach and consultant. I guide entrepreneurs from across the globe to achieve profitable, scaleable growth and create businesses that are Built To Succeed™. Built To Succeed™ is my proven success system, developed during my 8 years in the trenches as a CEO, 25 years’ experience at senior leadership and managerial level and training at Cranfield School of Management, the UK’s leading business school. It’s this background that sets me apart and helps my clients to get BIG results.
I’d love to start a conversation. Simply use this link to arrange an informal Skype coffee chat. There’s no hard sell. Just solid advice and a straightforward, honest assessment of whether 1:1 business coaching (or business consultancy) would be a good fit for your business, the results you can expect and how to get started.
To get a copy of my e-book, ‘How To Take Control Of Your Business … And Get Off The Cash Flow Roller Coaster,’ click HERE.
DOWNLOAD YOUR FREE 2017 FINANCIAL SUCCESS KICKSTARTER
Enter your email to get exclusive access to my FREE financial success kickstarter. This planner and short e-course will give you all the help you need to prepare your 2017 financial plan.