Business Budgets: Why They Matter And How To Make One
Business budgets are critical to success for all businesses, especially small businesses. Why are they critical? Provide visibility and calculations about the potential profitability of a business. Budgets and forecasts are not an exact science, more like a starting point for making major business decisions.
Here’s how to start making a sales and expense budget for your business.
1. Revenue/Sales: To the best of your ability, estimate the expected revenue/sales of the products or services that your business provides. You can budget for a year or you can keep it simple and budget for 1 month at a time.
a. How to start?
i. Use historical sales data to support your budget.
ii. Estimate sales based on the amount of inventory available and how many clients will purchase that inventory.
iii. Use website traffic/data to see how many visitors actually buy your product/service.
2. Cost of Goods/Services Sold: Understand your Cost of Goods Sold (COGS) and factor this amount into the budget.
a. How to start?
i. Research the purchase price for a product that you sell.
1. If you buy a product for $5 and sell it for $25, your COGS is $5.
ii. Calculate the direct costs (labor and materials) or your product/service.
b. What’s next?
i. When you’re looking at your overall budget, the COGS amount of all sales needs to be reduced from the potential profit of your business.
3. Selling, General, and Administrative Costs: Understand and list all of your recurring expenses that are NOT included in COGS. These expenses include Selling, General, and Administrative Expenses.
a. Rent, business insurance, payroll for employees, gas and mileage, materials and supplies that are not a part of COGS, debt service, etc…
Once you have all of these data points identified, you can start to compile a budget. Your budget at the most basic level is this formula:
Expected Sales (Revenue) – Cost of Goods Sold – Overhead Expenses = Business Profitability
Once you have compiled your forecast/budget, you can answer questions and make decisions:
1. Will the sales of my product/service generate enough money to be profitable?
2. Do I need to reduce expenses to increase my profits?
3. What marketing and sales strategies do I need to implement to make my business meet the sales forecast that I’ve budgeted?
4. Do I need to look for alternative suppliers and vendors for my products or overhead expenses?
Every successful business operates with a solid budget that tells them where they’ve been and where they are going. So, reach out to set-up a meeting with a business coach to help you compile a business forecast/budget. Our coaches are here to help, book an appointment today!