As we previously discussed, having an effective and yearlong budget that is consistently being reviewed and updated is essential for your small business. If your business is not at a maintenance stage in budgeting because you lack a budget, the following recommendations will help you get started. They will offer insight into understanding the rationale behind the process/need and will help with initial action steps in creating such documents. Beck and Company Certified Public Accountants and Business Advisors have extensive experience in helping small business owners just like you with these essential tasks. We offer free consultations to help you achieve your financial goals.
Budget: What is it and why do it?
Definition: Before getting started with the action steps, it is important to know why what you are about to do is important. A budget is a tool that helps you deal with the future and turn expectations into reality. It allows you to set goals and list the necessary steps to reach those. It helps you think about what you really want from your business in the future.
Purpose: By planning, your business is in a much better position to act in prevention of possible crises instead of react to actual crises that may have already done damage. Having a detailed plan with listed future receipts and expenditures creates a guiding framework of projected profit and loss. This can then be used after a designated period of time to compare actual results with anticipated goals. The resulting decisions from this data can lead your business to greater success. For example, if some of your expenses were higher than expected, look for ways to cut them. If you’ve fallen short of goals, you will need to look for ways to increase income.
Action Step #1: Start by Creating a Budget
If you have not already done so, starting with the creation of a budget is a vital first action step. Now that you know more about what it is and why your business needs one, working up this document will help you clearly determine whether or not your profit goals are within reach. It should be written down with a focus on determining what is essential and non-essential to your business. Be sure to set realistic parameters.
Not sure where to begin? There are two common methods you can choose from. You can start with a forecast of sales and work down. Conversely, you can start with a forecast of profits and work up. The latter is more common. In this method, you should decide what profit you want to make and then list the expenses that will be incurred to reach that predetermined profit. For more tips and further details from Beck and Company CPAs on this initial process, visit here.
Action Step #2: Determine if Your Present Profit is Sufficient
Before being able to truly use your newly created budget effectively, you have to be sure that your current profit is what it should be. At the end of the year, it should be large enough to make a return on your investment and a return on your own work (pay you a salary). Do you actually make the same, if not more, than you could working for someone else doing the same thing? In addition, does this profit include a return on your investment into the company? That investment includes the money you put into the firm when you started it and the profit of prior years which you left in the firm (otherwise known as retained earnings). Don’t neglect the importance that taxes play into your overall totals so that you truly are making a profit.
Now that you know what you made last year through your newly created budget, you are ready to set goals for the future of your company. Stay tuned next week for a further look at setting and achieving these goals. Need more assistance before moving on to future profit goals? Beck and Company CPAs would be happy to help you. Please contact us.