Estimating and matching expenses to revenue (real or anticipated) is important because it helps business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in or, conversely, not spending enough money to grow the business and compete.
So you assemble a budget spreadsheet that starts with your projected profit, then accounts for the operating expenses required to generate that profit, and calculates the gross profit margin, and then estimates the required sales revenues. You look over the results and decide that the profit goal is doable because the sales revenues are realistic and the required expenses are complete. But are they? Have you considered all of the following?
Purchase Price vs Landed Price
Does your budget account for the difference between the purchase price for a product and the landed price? The landed price is what really matters, because it includes the costs of freight, duties, taxes, storage, etc. Knowing the true cost of getting the product into your hands is crucial when setting the price and insuring profitability. Clearly it is advantageous to reduce the cost of each or any component of landed cost. Each one will allow the seller to lower the final selling price or increase the profit margin associated with that sale.
Slow Growth
Many entrepreneurs don’t account for how much money they will spend if their idea does not take off as fast as they hope. When budgeting, make sure to create at least one “very worst case” scenario that does not have much or any growth, just so you know what will happen if it all goes wrong.
The Effects of Scale
Scaling may affect more areas of your business than you can anticipate. Ongoing processes such as training new employees and maintaining quality control are just some areas that might get exponentially more difficult, without even factoring in the effect of any new operations. Be sure to budget in the money and time to make systems and procedures more efficient, as new problems related to scale will inevitably arise.
Insurance, Equipment and Software Applications
Three of the biggest expenses that may surprise you as an entrepreneur are:
Insurance: You need to budget in much more than you pay as an employee for health, disability and business insurance.
Equipment: Will you need additional equipment and office furniture to provide the production capacity that your profit projection required? Even simple items like tools, racks, chairs and file cabinets can add up to substantial costs.
Software: You’ll need to purchase licenses for each user.
The Cost of Networking
Entrepreneurs sometimes forget how expensive it can be to do networking in the right places. Conferences, for example are great for networking. However, ticket costs, hotels and transportation to conferences add up. Even if most of your networking is at free or low cost events, consider how much money is spent taking people out to lunch and coffee to network with them one-on-one afterwards.
The Costs at Home
When you’re caught up in the fast pace of running and growing your business, it’s easy to forget that there needs to be at least enough money to put food on the table at home. Even if you cut your personal expenses down to bare bones, they do still exist. Make sure they make it into your budget, rather than stressing about them down the line.
Paying Taxes
It’s easy if you’re self-employed, especially if it’s in a start-up, to forget to put enough money aside for taxes. Budget 15-20% of gross revenue or 35% of net revenue (until you know your business better) for paying the taxman. It would be advisable to put the money aside in a separate bank account every month so you’ll always be able to make your tax payments in full and on time.
Unpredictable Costs
There will always be costs you couldn’t have predicted, and because of this it’s important to have a buffer-fund of as much money as you can spare to handle those server crashes, extra hires or other incidental costs you couldn’t have known to figure into the official budget. Consider that an extra 10% of your budget should be included in a Miscellaneous Expenses line item on your budget spreadsheet.
Review the Business Periodically
While many companies draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.
Bottom Line
Budgeting is an easy but essential process that business owners use to forecast (and then match) current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid emergency fund.
Profit is important because without it your business will fail. But for small businesses, cash flow is king. Your company’s cash flow will determine its profitability, and scrutiny of your business’ cash flow will increase your control over this dynamic. Follow these 4 cash flow tips to establish the structure you need to succeed.
of people decide to take the entrepreneurial path and start their own business. The idea of being your own boss, making it big, and having a company that you can point to as your life’s work is very appealing. But the realities of starting up a small business are sometimes overshadowed by myths which make it difficult to deal with the real challenges that arise in those first few years, resulting in unreasonable expectations, frustrated entrepreneurs and potentially a failed business.
Most small business owners can agree that saving more money is a continually reoccurring topic. Cutting costs, boosting cash flow and paying less in taxes, will allow you to keep more of what you make, and is a good entrepreneurial frame of mind to be in.
