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Small Business Budgeting 101: Budgeting Can Help Make Goals a Reality
Budgeting for a small business does not have to be difficult. This article provides a simply look at how to create a business budget.
By DeAnna Stephens Baker
Date Posted: 11/1/2010
With the end of the year just around the corner, creating a budget for 2011 is something that every company should be working on or already has in place.
However, many small businesses, including those in the pallet industry, do not create annual, bi-annual or even quarterly budgets. Instead, they are run on what is basically a cash basis. If the money is there, it can be used; if it's not it can't. While the lack of a budget does not automatically mean that a business is going to fail (many companies do run for years without budgets), it can prevent companies from growing, reaching goals and having the ability to foresee issues that can lead to large financial problems.
The reasons for not creating budgets are usually simple. No one has time for it. Or they don't see the point in it. They got into this business because they like working with wood, not numbers. But it makes sound business sense to have a budget in place or at least analyze spending on a regular basis. A budget can turn business goals into reality, ensure that you have the money for future activity, and provide the ability to control finances and make confident financial decisions.
Writing a budget does not have to be difficult. It is basically a record of expected income and expenses for any given period of time. A budget consists of three main parts:
Because a budget consists of numbers, the way these three parts work together can be expressed in a simple mathematical equation as:
For a company to stay in business, the Profit needs to be a positive number. If it comes out as a negative number something needs to be changed; either the Total costs need to be reduced or the Revenue needs to be increased. Or you need to have enough cash reserves to make up the difference. But companies can only operate in red ink for a limited period of time.
To start a budget, a list should be made of all fixed costs along with a dollar amount. These are the costs that stay the same no matter how much or little product you sell. This includes:
Second, a list should be made of all variable costs with their dollar amount as well. These are the costs that can change, depending on your production. This includes:
Adding the fixed and variable costs together produces a company's total costs.
Depending on the product lines and services offered by your company, you may have a single line for Revenue, or you may want to break your income out into subcategories as well, such as the following:
Because a budget is a forecast of events that have yet to occur, it is important to estimate the income and expenses as accurately as possible. These estimates should be based on past figures.
Using reports from the previous year, estimate what your expected revenue and costs will be. Changes in the market and industry forecasts should also be considered. If lumber prices have been rising for the past six months and show no sign of leveling out, that should be figured into the expenses. If new pallet sales have been falling, that should be figured into your income. \
Estimating these numbers shows the importance of keeping good records. Programs such as PalMate (www.palmateerp.com) and Pallet Track Mill Manager (www.pallettrack.com) keep records organized and easily accessible. It can quickly generate sales reports, expense reports and show customer buying trends, all of which can be used as you estimate your expenses and income. No matter what record keeping method you use, you need to be able to access this type of information quickly and easily.
Because unexpected opportunities or expenses do arise, a budget is not set in stone. It is an action plan that can be changed. Having a budget in place can help companies quickly see if they can afford to expand into a new market or help them figure out where they can cut costs to cover the repair of a piece of machinery. Possibly the biggest benefit of putting together a budget is that it forces you to think through all of your expenses and see how they affect your overall profit. It can help you see how the cost of raw materials compares to your pallet prices and which product line is the most profitable. And for companies that have goals they are trying to reach, it can show them exactly what they need to do to reach those goals.
The best way to cut costs and increase your profits is to cut the unnecessary spending. Look at each expense and ask, "Do I really need this? Or can I pay less for it?" If you find unnecessary expenses, cut those items as it seems prudent.
Creating line items for every single expense can make a budget hard to handle and take a lot of unneeded time. For example, saw blades may not need their own line; include them under machine maintenance.
A simple addition mistake or a misplaced decimal point can mess up an entire budget. Check and recheck all the numbers to make that they are correct. Apply the common sense rule. If it looks strange or questionable, examine it clearly.
Reduce surprises by asking for input from someone in each area of your company. This becomes more important the larger a company gets. For example, the sales manager may be able to tell you what products have not been selling and the maintenance manager may be the only one who expects the sawmill to need major work within the next year.
Once a budget is finished, don't lay it aside and move on. Throughout the budget period, the expected numbers should be checked against actual numbers to ensure that both income and expenses are where they should be.