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Home » Business And Finance Articles » Preparing A Budget

Preparing a Budget

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 the year.

The budgeting process usually begins with the collection of accounting data. In order to prepare a strong and achievable budget, you must analyze each item of income and expense from the prior year. If your accounting system is a mess and the figures are inaccurate, the 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 the same vein to accomplish the same results.

You also need to analyze your weak spots. If possible, set up some type of internal control over the weak areas. A cost analysis will help you determine if you are actually making money on the sale of a certain product. This is a big problem with new business owners. They don't do the research or due diligence in determining the 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 the number of billable hours you might reasonably expect to charge for within a year's time. If you are in sales, try to establish the number of items you will be able to sell. After determining the 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.

Another type of expense is a variable one. In budgeting, this is known as a variable "cost," which is a cost that increases with the level of sales or income. They are variable because the more income you generate, the greater the costs you will incur (this just means the more you sell, you more you have to buy).

If you have others working for you, sales commissions are an example of a variable expenseâ€"the greater the sales revenue, the greater the sales commissions.

You need to be sure to do research before starting your business to determine what comprises your fixed and variable costs.

Certain types of businesses have an established profit margin. This information may be available by simply asking other professionals in your field. Your accountant sees thousands of tax returns and may be able to give you an idea of the average "cost of sales" or "profit margins" for your type of business. The averages for certain industries are also compiled by financial ratings organizations such as Dun & Bradstreet, Moody's and Standard & Poor's. For example, if you are starting a coffeehouse, you could compare your sales, gross profit ratio, and net income to the averages for the retail sales/coffee industry compiled by Dun & Bradstreet.

It's amazing how many home based and small-business owners don't know if they're making a profit on service, parts or sales. Others don't know whether they're making or losing money on a particular job. The purpose of the accounting and budgetary process is to help you answer these questions and make the right management decisions. You can't plug the leaks in your revenue ship if you don't know where the holes are.

Again, using a program like Quickbooks allows you to see where time is spent for a particular project, what your costs are, how many employees were needed to complete the project and the time it took them (which gives you an idea of salary differential for certain projects).

If for example you are running a consulting business, Quickbooks allows you to track the number of hours you work on a project and what your costs are. In most consulting businesses your time is your valuable commodity. You need to be compensated for the time you spend on a particular project or with a client.

Copyright 2003 DeFiore Enterprises

And here is another random article you might be interested in...

Which Type of Fear Might Be Holding You Back from Success in Business?

Good ideas are literally "a dime a dozen". Individuals conceptualize revolutionary new products and new services with each passing minute of each day. Although there is such a steady stream of ideas that can be marketed successfully and developed into a lucrative business, there are actually few new businesses that make it past the "initial stages" into actual existence.

Why is this, and what factors contribute to the abandonment of great ideas that could've possibly netted the creators a small fortune?

There seem to be two major psychological forces at work when a great idea is abandoned before completion or a business fails for no apparent reason. These two psychological syndromes are:

1. Fear of Success
2. Fear of Failure

It is a very frightening prospect to start and maintain a home-based business. There's no doubt about that. And every business owner feels the "fear" of being responsible for their own destinies, and for their own futures. It's quite common, to be somewhat nervous and stressed about our businesses, especially in the beginning.

Conquering this fear is a necessity, however, as no one can be effective in a business if they allow the fear to overwhelm them.

Fear can be "healthy" in a way, as it can keep an individual alert and aware of any failures of the business, which thwarts problems before they start. Fear can also be "unhealthy" when an individual experiences such fear that it leads to inaction and the business never really gets off the ground as a result.

The two fears above seem to be the most prominent among new business owners. In the first, Fear of Success, a new business owner may have a great idea, and may develop every facet of the business thoroughly, yet they never seem to "open" the doors of the business. They may find excuse after excuse, why they can't really put the business into play, although all facets of the business are established. They may find that they run into repeated crises in their lives, sickness of themselves or a loved one, disasters that are not "really" disasters crop up repeatedly. This is simple Fear of Success, and part of a psychological pattern.

Although crises do occur to us all, we go on with life despite these, and no one has crises that are continuous. A business owner with this syndrome is merely afraid that success will "change" their lives and they are afraid they won't be able to cope with the changes. Of course, success will change someone's life. However, the Fear of Success can be so overwhelming, that some new business owners simply let the business fall by the wayside, thereby ensuring its failure. After all, if the business fails to get started or to succeed, they never have to face the reality of their "Fear of Success".

The second fear is just as detrimental as the Fear of Success. This fear is the Fear of Failure. This fear seems slightly more common and is characterized by the inability of future business owners to even get "started" with any plans or any concrete method of establishing a business. They constantly procrastinate in even the most simple of business chores. They fail to ever establish the business in any way, and for the most part are always promising to "start tomorrow", only tomorrow may never come. They also may jump from "idea to idea" always hatching a new plan for the next great business. Unfortunately, the plans are the only thing that is ever hatched, as nothing concrete ever materializes. They can be seen by their family and friends as mere "schemers"/ "daydreamers".

Occasionally, business owners can "waver" between the two fears, actually experiencing both Fear of Failure and Fear of Success simultaneously, becoming almost paralyzed with the emotions of all this, and unable to attend to the business with any degree of rationality. They can start businesses over and over, or make plans for businesses over and over, and yet never see any real degree of success.

These fears, like all other fears, can be overcome. There are many methods to use to overcome them:

1. A business owner needs to stop "projecting the worst case scenarios" onto the business. This is by far the most effective method. Business owners that worry too much about the worst happening, eventually make this projection a reality.
2. Business owners need to be realistic about the timeframe involved in success. A good business may take months or even years to stabilize.
3. Business owners need to be aware of their own feelings and motives. When "stalled" within a business, they have to question their own inner emotions and ask themselves if perhaps their emotions are overruling their own common sense.
4. A business owner will need to have as much personal and business support as possible behind them. This includes family, friends, and of course, other business people. Knowing we are not "alone" can easily alleviate misgivings and misconceptions.
5. A business owner should take time to relax and de-stress whenever needed. Fears become more palpable and real during times of extended stress.
6. Business owners should always have well thought out plans of action. Good plans reduce stress and the symptoms of stress, which exacerbate our fears overall.

It is best if any potential business owner addresses their fears and their approach to life as well as their motives before starting a new business. It is better to address any underlying issues prior to beginning a business, as addressing them while "within" the throes of a hectic business start up is difficult, if not impossible.

Remember all fears can be conquered, and it is better to have tried and failed than never to have tried at all!