Creating a Budget and Sales Forecast
A pilot would never fly a plane from Los Angeles to San Francisco without a flight plan that explains how to get there. Yet all too often, small business people open their doors without clear plans to help them get where they want to go. One of the easiest ways to get there — wherever that is — is by creating a budget and sales forecast.
A budget doesn't have to be a restrictive plan that forces you to deprive yourself of what you want. In fact, a budget should be a guide, not a constraint. A reasonable budget allows you to do what you want. It allows you to use your resources where they're most needed, so your business will head in the right direction. Creating a financial plan lets you control your business's cash flow instead of it controlling you.
Creating a budget doesn't have to be a complicated or time-consuming task. Actually, in the beginning, it's best to keep things simple. The key is to determine how much you'll spend and earn in any given year, and then use that figure to project how you want to grow in subsequent years.
If you already own a business, it's simply a matter of digging through some records to see where the money went, and deciding where you actually want it to go. If you're a new entrepreneur, you'll need to do some homework and make realistic assumptions about your business. Either way, a budget is simply a tool that allows you to put your money where it can best be used.
To get started, answer the following questions:
- How much can you realistically sell next year?
- How much will you charge for your goods or services?
- How much will it cost to produce your product?
- How much are your operating expenses?
- Do you need to hire employees? If so, how many, and how much will you pay them?
- How much will you pay yourself?
- How much payroll tax and unemployment tax will you pay?
- How much money do you need to borrow, and how much will your monthly loan payments be?
The answers to these questions will form the basis of your budget and forecast. If you've already written a business plan, you should know the answers to many of these questions. If not, then this is a lot of information to try to forecast. In either case, answering these questions will help you determine two essential things — your projected income and your expenses.
In the income category, conservatively estimate how much sales revenue you'll have next year. Look at what you made last year, and extrapolate and forecast from that. New business owners without this kind of history should try to determine how much their competitors gross, and use that as a guide. Remember to be realistic. If you paint too rosy a picture, 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 advertising, auto, insurance, rent, taxes, phone, utilities, equipment, payroll — in other words, any and all business expenses, whether you pay them now or incur them in the future.
Once you see your projected income and expenses on paper, you'll know exactly how much you need to make every month to keep things afloat, and how much you'll have left over for extra expenses. It will be far less tempting to spend money on business expenses that aren't part of your plan. And that's really what a budget is for — to ensure that your expenses aren't more than your income, so you can keep your company afloat. It's as simple as that.
