Considerations for Your Business Budget
Creating a budget for your business can appear intimidating at first. Budgeting can be very complex, especially if you are just starting your business. However, knowing the important elements of a budget will help you decide how you will divide up your resources.
One of the ways to begin determining your budget is to set some sales goals. It helps to know how much you want to make before you start so that you can calculate how many units you may need to produce or how many clients you need to have.
A key to determining your revenues is to figure out your pricing strategy. Initially, you'll have to find a competitive price by conducting some market research to find your competitors prices.
After operating for a year or more, you will be able to conduct a financial analysis and ascertain some key indicators of pricing, such as product contribution margin, or sales volume variance.
The contribution margin tells you the profit each unit generates and can help you establish your break-even point, which tells you the minimum amount of units you need to produce to break even.
The sales price variance is the change in expected revenue from sales. In other words, it is the difference between the budgeted sales price and the actual sales price.
Production Volume and Cost
Once you have your desired revenues, you can begin to determine the number of products or services you need to sell to make your revenue goals. The costs of production for your services or products will allow you to see if you have set your revenue goals too high or too low.
Production volume is the number of units a business has to produce to meet it's sales goals. It is also the total amount your business can produce in a period.
Production costs are the costs that are directly related to the production of goods or services. Examples of production costs are materials, labor salaries and wages, and factory overhead (if your business is a factory.)
Factory overhead comprises the costs related to production, which are not spent on what you are producing. Examples of this could be salaries for the floor manager or the cleanup crew.
Work on balancing your sales revenues and production costs until you find the combination that works for you.
Take stock of your operating expenses. There is a large list of operating expenses that depend largely on your industry. Some examples are office-related expenses, salaries or compensation not related to production, and sales and marketing expenses.
Office-related expenses are expenses such as legal fees, office supplies, and office utility costs. You may hear some of these expenses referred to as selling, general and administrative expenses, or SG&A.
Some sales and marketing expense examples are advertising, materials costs, or client entertainment costs (such as dinner).
Determine how much cash you have and how much you'll need to have. Cash or cash equivalents allow you to pay your expenses. Cash equivalents could be money orders or bonds.
Cash flow statements allow you to view where your cash is going. With an understanding of your cash flow, you can decide how much cash you need to keep available for covering your short-term liabilities.
Another consideration for your budget is an emergency fund. How much you'll need depends on the type of business you operate and what expenses you believe you may incur.
An emergency expense example is storm damage to your facilities. Damage from storms may be covered by your insurance, but you will have to be able to pay any deductibles and for anything not covered by the insurance policy.
Emergency funds are usually placed into the category of retained earnings on your balance sheet. Retained earnings are revenue that is kept after all expenses and liabilities are paid.
You may want to consider having a sub-category of your retained earnings for emergency funds and keep these funds separate from other earnings so that they will not be spent.