Ok, you say, I know I need a budget, but how do I prepare one? The most common budget period is one year, but this can vary depending on whether or not your business has seasonal or cyclical fluctuations. For example if you run a Christmas decorations shop, or a costume shop your business is going to peak during certain times of
year. The budgeting process usually begins with collection of accounting data. In order to prepare a strong and achievable budget, you must analyze each item of income and expense from prior year. If your accounting system is a mess and figures are inaccurate, numbers used in your budget will be useless. This is why it is so important to keep good records. Quicken and Quickbooks are excellent programs to help you with setting up an accounting system that is easy to use and understand.
If you can review your prior year’s figures with confidence, try to cultivate your strong areas and look for ways to increase performance or volume. For example, if one particular product sold well, take a closer look at that product. What you did to market it, etc. and try to model your other products in same vein to accomplish same results.
You also need to analyze your weak spots. If possible, set up some type of internal control over weak areas. A cost analysis will help you determine if you are actually making money on sale of a certain product. This is a big problem with new business owners. They don’t do research or due diligence in determining need for their product. In effect, they spend a great deal of time and money with a product that is never even going to break even. You cannot get emotionally tied to your product. If it is not selling, let it go and move on to what is selling.
If your business is in its first year, your budget will involve a little more homework. Keep in mind that a budget is an expression of your goals. Try to determine number of billable hours you might reasonably expect to charge for within a year’s time. If you are in sales, try to establish number of items you will be able to sell. After determining revenue portion, you should look to your expenses.
Some expenses, like rent, will be fixed because they do not change from month to month. For example, if your office space rent is $3,000 per month, you must still pay $3,000 per month, regardless of whether or not you have made any sales or earned any income. This is why working out of a home office, if you can, is so much better. You can substantially cut your rental costs down.
