Posts Tagged ‘budget’

Is Your Budget Incomplete?

October 8th, 2013

Is your budget incomplete?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.

Simplifying the Profit & Loss Statement

March 29th, 2012

You might not need to be an accountant to be successful in business, but understanding financial reports will help you understand the basics of financial management and feel comfortable using standard financial tools and metrics to monitor and appraise the performance of your business.

How a Profit & Loss Statement helps you manage your business

Financial reports distill the vast amount of daily business data your company produces and arranges it into a usable format, useful in making the best possible business decisions.

Producing regular profit and loss statements, at least quarterly or monthly, will enable you to:

1. Answer the question, “How much money am I making, if any?”

2. Compare your projected performance with actual performance

3. Compare your performance against industry benchmarks

4. Use past performance trends to form reasonable forecasts for the future

5. Show your business growth and financial health over time

6. Detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses

7. Provide proof of income if you need a loan or mortgage

8. Calculate your income and expenses when completing and submitting your tax return.

What is a Profit & Loss Statement?

A profit and loss statement, also know as a P&L or an Income Statement, records sales income, costs and expenses and shows business performance over a specific period of time.  Profit and loss statements:

1. Show business performance over a specific period of time

2. Show income (revenue from sales)

3. Show the costs of the goods you sell (Cost of Goods Sold) such as purchases made from suppliers for goods or raw materials

4. Shows your gross profit (income minus cost of goods sold)

5. Show operational expenses (overhead and other expenses of running your company)

6. Show net income or loss (whether a profit or loss has been made )

Creating a Profit & Loss Statement

The figures in a profit and loss account will come from a number of different sources in your business, so it’s best to organizes and categorize your day to day receipts and expenses into a Chart of Accounts which represents the income and expense categories you want to track and evaluate. This Chart of Accounts forms the core structure of your bookkeeping system, and will be the basis for your Profit and Loss Statement.

A Profit and Loss Statement will usually look something like this:

$250,000       Income
  $10,000        Less Discounts
$240,000        Equals Net Income

   $50,000       Less Cost of Sales/Cost of Goods Sold
 $190,000       Equals Gross Profit

$100,000       Less Operating Expenses
  $90,000       Equals Operating Profit

$5,000        Plus Other Income
    $3,000        Less Other Expenses
  $92,000        Equals Net Ordinary Income (Profit Before Taxes)

  $33,000        Taxes
  $59,000        Net Profit (or Net Loss)

 Accounting Software and Financial Reporting

Accounting software makes it easy for you to create different views of your data. For example, you can compare this month with last month, this year-to-date with last-year-to-date, several months in sequence, or you can convert the figures into percentages and compare them that way. All this makes it easier for you to identify trends over time.

Your goal in business is for your sales and profits to increase, and your expenses, as a percent of sales, to decrease. Look at your profit and loss statements and compare them from one period to another. Are there any sudden changes or anomalies that raise a red flag? For example, if your office expense spending suddenly rose from $100 a month to $500 for one month, you would want to look into this. Or if your staff costs on average 30% of your income and this figure suddenly goes up to 40%, again you would want to investigate.

You can also draw some deeper conclusions than just seeing that more money is coming in than before. Is the increase equivalent to, or better than, the rate of inflation? Is it the result of more sales, or is it hiding the fact that although you have charged more per sale, you actually made fewer sales? And looking ahead, is the rate of increase in line with your goals, or do you need to set a new target? These are just some of the many questions accurate reports can help you address.