- Benjamin Franklin –
Charlie and I wrote down our insights and lessons from hearing Mr. Paterson’s business budget story and discussing it. Here are my key learnings:
- Yearly budget plan should be split to monthly budget plans (both for revenue and expenses) and preferably (for larger businesses) weekly budget
- A business budget should take into consideration the reality of your business (Are you planning to get all your services paid upfront? Do you plan to have payments schedule? Will you pay your worker before or after the work is done? Are your insurance premium paid in advance?)
- Something will always go wrong, when writing your business budget, remember to allocate funds to a miscellaneous or buffer expenses category
- On the revenue side of your budget, make sure to include the drivers to your business revenue numbers (for example your estimated number of clients your business will service, number of services your business will offer). Track those drivers as well and adjust your forecasted revenue (and variable expenses) based on your business reality. (Yes….less clients usually means less revenue)
- Sounds obvious, but make sure to include ALL your expenses, if you discover your business incur new expenses during the year make sure to add those expenses to your business budget
- Try to “bounce off” your budget with other people from your industry, I promise you will discover many hidden expenses you forgot to include (and if you are lucky some new revenue sources)
- Stick to your budget!
Once I understood these lessons, writing a budget was a much clearer task. Let me tell you about my fabulous 6 steps of creating my business budget.
Step 1 – Creating my budget categories
I write down the 3 main categories (Revenue, Fixed Expenses, Variable Expenses) on my excel spreadsheet. Under each of my main categories, I write all the subcategories. Here are some of my business budget’s main categories and subcategories, of course your business may have more or different categories.
- Corporate packages revenue
- Beverages cold/hot revenue
- Chocolate boxes revenue
- Individual chocolate sales
- Equipment Maintenance
- Marketing (as well as its own subcategories)
- Chocolate boxes
- Plastic bags
Don’t forget the third and fifth lessons, I always add a miscellaneous category (I usually use 5%-10% of total expenses as my allocation for this category). I know it is very tedious work, but you have to include all your expenses.
I add a Total Revenue row (which is the sum of all the different revenue categories), a Total expenses row (sum of all the expenses) and a Pretax Profits (Total revenue minus total expenses) row.
I create 2 columns for each month of the year, one column with a heading of “January-Budget” and the other “January – Actual” as well as a Total column. These columns will be used to enter the budget dollar amounts (estimation) for each category and to track the actual revenue and expenses. (Remember the first Lesson?)
I have consulted with other people from the industry and also reviewed the many sources on the web (sba.gov is a good place to start looking for information) to find if my budget categories encompass all the real expenses my business is expected to incur.
Step 2 – Create an assumption sheet
In my excel spreadsheet, I create one more sheet in which I include all my assumptions across the different categories. For example, for the revenue category, I assume I will service this year 10 corporate contracts delivering 50 chocolate boxes to each corporate over a year’s time at an average price of $100 per box.
I also write my assumption of the number of individual clients my business will service this year (the second lesson is very important in this step, I take into consideration the seasonality of my business (summer is rough, valentine’s day is gold…).
As I wrote in lesson number 4, I try to include in my excel spreadsheet all the drivers influencing my projected business revenue as well as my expenses assumptions.
Step 3 –Entering the numbers Charlie hates when I just call it numbers…
This is a crucial step; it is where the fun begins. I enter all my estimated revenue amounts and expenses amounts (based on my budget categories and my assumptions) for each month of the year.
It is extremely important to remember both the seasonality of your business and that some categories behave different than others. For example, I pay rent every month but my insurance expenses are prepaid every 3 months. All this is reflected in my budget.
Step 4 – Seeing the big picture and the details, summing it all up
I use the excel function (sum) to add all my revenues and all my expenses for each month and then use the Pretax Profits to calculate my revenues minus my expenses. This is where I usually see how good (bad?) the month is projected to be. I know the summer months will be rough for my business and I always make sure the first few months of the year are budgeted to build enough “cash cushion” for my business to survive the June-September lull.
Charlie always says that after completing this step, one should take a cup of coffee (hot chocolate) and study the numbers. If the numbers do not portray a great picture (for example, your business operate at a loss), you need to go back to the drawing board and make sure all your assumptions are correct. Sometimes it might even save you from starting a wrong business…remember poor Mr. Paterson!
Step 5 – Review, update and adapt
I review my budget plan and update my plan (using the Actual column) every month. On the first week of the month, I review my business standing, do not wait a year, do it every month. After the review I am more aware of the necessity of reducing costs, changing my pricing model, or even adding new categories. The important thing to remember is that your budget is a living plan. You need to adapt to realities and adjust your plan when needed.
Step 6 – Repeat
At the end of the year, I know much more, I know where I spent more than I assumed, I know how accurate my assumptions were, I know my revenue streams behavior and I use all this to…yes, drum roll…to create my business next year’s budget. I told you its fun!
Charlie and I are reviewing my current month’s budget so until next time, may you live long and prosper (only a few months until the next Star Trek movie, yea!!).
Liz (A budget master)
Thanks Charlie for helping me with this blog post, I wanted to make sure I get it right!