Budgeting

Budgeting can be an involved process, especially the first time through. As you work through your numbers, you are sometimes shooting in the dark because you don't have enough historical information to work with. That's OK. With your first budget, you are building your foundation and each year you add another layer of brick and mortar and build your insight to how your business functions and where you can make adjustments to increase or decrease costs.

I think the best place to start is with your expenses, particularly if you are working on your first budget. If you already have some figures from previous months or the preceding year's activity, you are at a nice starting point. Look at these figures and study what is higher and lower than you expected. Then look at what percentage each expense is of the total of the expenses. From seeing this information, you can get a feel for where you need to plan your amounts for the next year. It will be good to look at the items that have caused a particular expense to be unusually high. It may turn out that something got put into account A instead of account B. Correcting these errors will give you a new picture and a better view of where your costs really are. In the future, you will be watching the performance of your actual expenses vs. your budgeted amounts and make the corrections throughout the year so you don't have a lot of fixing up to do at the last minute.

Now that you have your corrected figures, you can look again at where your highs and lows are. Decide from this information if you spent too much in a particular area. You may have been too frivolous or you may have room to negotiate lower prices. You can also decide to actually spend more in one area or another. Remember that this is alright. In spending more, you are putting emphasis on items that may help you generate more income. The key to this is to still get the best prices so you get as much out of your dollar as you can, spending the savings on something else that you may need as well....even if it's money in your pocket (profit) to help you pay your bills at home more easily.

Before I go too far with the expense side of the picture, we have to remember to plan expenses so they remain within the income you will earn. If you plan your expenses well enough, it will be easier for you to set sales targets AND profit targets. If you budget your expenses to increase by 50% but you will only be able to plan on an increase of 30% in sales, you will have a problem. This will be the trigger to get you to re-evaluate your expense budget for realistic figures. Having a budget will eventually allow you to set aggressive sales goals and plan for expenses and profit that will match.

More on this to come. Let me know if you have any questions or comments.