Without a budget, it’s difficult to measure business performance (an essential for survival). Having a budget also allows you to produce a cash flow forecast and examine profitability. Then, from there, you’ll be working with your accountant to plan tax.
A budget is typically done in accrual mode, i.e., when an invoice is produced and when a supplier invoice is received. Remember: cash flow is when the actual money moves.
Questions your budget will answer:
Where is your money coming from?
When assessing potential revenue, you need to consider single sources of income, look at contracts, potential competition, and opportunities to grow.
To estimate you may like to keep a track of leads and proposals and the percentage likelihood of winning each deal to calculate an estimated revenue. Alternatively, it may be a planned regular increase in sales that you use as an estimate.
Note: this is always a guesstimate. If you end up under or over-achieving your revenue budget then find the cause, address this within the business plan, and adjust your ongoing budget. Again, your budget does not have to be fixed in concrete. Business environments change.
Put simply, direct costs concern anything directly affecting the movement in sales revenue. E.g. permanent or contract labour, materials and supplies, external services, or payment fees.
More specific examples; you’re only incurring fees if the customer pays by credit card, you’re only buying supplies to fulfil sales, or labour is only incurred to deliver what the customer ordered.
A lot of industries have standards that you can measure against which can be helpful in looking at your plan and performance. Or you may choose to keep an eye on this to ensure it doesn’t vary too much.
These are your fixed expenses such as insurance, rent, vehicles, lighting, power & heating, subscriptions, website, IT costs, and phone costs.
We have a chart of accounts specific to your industry that offers a great guide to refer to. Contact us to chat about it.
Bottom-up budgeting means to start with the net profit you need and then work backwards to calculate how much revenue you need to achieve that profit.
$125,000 Sales Income Required
-$50,000 Cost of Sales (40%)
$75,000 Gross Profit
-$55,000 Average operating expenses
$20,000 Net Profit – Income to you and money to service debt.