A pilot would never fly a plane from Los Angeles to San Francisco without a flight plan. Yet all too often small businesspeople open shop with no clear plan for how they will get where they want to go. One of the easiest ways to plan for the future of your business is to create a budget and sales forecast. Whether you want to expand into a chain or simply increase your profit every year, a budget is the tool you can use to accomplish your goals.
Most of us view budgets as a necessary evil at best and something to be avoided at worst. A budget should be a guide, not a constraint. A reasonable, good budget is nothing more than your plan for how to use your business resources most effectively. It allows you to put your money where it is most needed so that your business will head in the right direction. Creating a financial plan lets you control your business' cash flow, instead of it controlling you.
Creating a budget need not be complicated or time–consuming. In fact, keeping it simple in the beginning is the best idea. The key is to figure out how much you will spend and earn in any given year, and then use that to project how you want to use that money next year. When you already own a business, it's simply a matter of reviewing your records to see how much comes in, where it has been going, and then deciding where you would rather have it go. If you are new to business, then you will need to do some homework and make some realistic assumptions about your business. Either way, that is all a budget is — a business tool that allows you to put your money where it can best be used.
A budget falls into two categories: projected income and expenses. In the income category, you must conservatively estimate how much you can make in the next year from all sales. Look at what you made last year, and extrapolate from that. If you are new to business, figure out what your competitors gross and use that as a basis. Be realistic. If you paint too rosy a picture, then you can easily get in over your head and spend money that never materializes. If you make more than your projected income, great. But if you make less, watch out!
As far as expenses go, consider every expense you have, such as advertising, auto, insurance, lease payments, taxes, phone, utilities, equipment, payroll — all expenses that you anticipate will be borne by the business next year.
