As the end of the year approaches, many small business owners begin to think about the future. Companies founded in 2016 may be working toward their first-ever full year budget as they transition from a startup to a more established business. But no matter how many years a company's been in existence, formalizing the annual budget process helps keep spending on track.
Step 1: Set Overall Spending for 2017
When designing a small business budget, it's a good idea to start by taking a look at the big picture and determine how much money is available to spend in 2017. Base total spending on last year's expenses, but also take into account expectations of future sales volume. How much product needs to be manufactured to meet customer demand? And how much will it cost to produce the product? If additional employees are needed to achieve sales goals, determine the added salaries and associated expenses.
Step 2: Calculate Line Items
Once an estimate of total spending is established, the next step is to calculate individual line item expenses. Examine year-to-date 2016 spending in detail and annualize monthly expenses by category to predict 2017 totals. An online accounting system can help track expenses by line item and group them into areas like cost of goods sold, administrative expenses, and salaries. Use current data to calculate changes in expenses as sale volume increases. Creating different scenarios allows for greater budget flexibility. For example, if the cost of raw materials is expected to rise 10% in the next year, insert this change into a separate version of the budget. Compare the differences to baseline expenses and analyze the effects on profitability.
Step 3: Plan for Investment in Technology and Equipment
Aside from the day to day spending required to run a business, investing in growth is also important. When devising a budget, review planned software, hardware, and equipment purchases for the upcoming year. Make sure the company is keeping up with employee growth and trying to gain efficiencies with advancements in technology.
Step 4: Prioritize Projects
Entrepreneurs are forward-thinkers, always keeping their next big project in mind. If a company intends to grow and expand in 2017, then project expenses should be built into the budget. Prioritization of projects is essential. If revenues fail to keep up with expectations, it's important to know what areas of the company must be funded and what growth ideas can be set aside. Likewise, if revenues exceed expectations, having a clear idea of where the company is headed helps to focus spending for the remainder of the year.
Step 5: Add a Cushion
Don't let surprise expenses throw the budget out of whack. It's impossible to predict every change in the market and external forces often can greatly affect a small business. Adding a small cushion for discretionary expenses or unexpected items keeps a budget flexible and allows for minor additions to line items when business conditions change throughout the year.
A small business budget takes time to prepare and can be costly if ignored. When expenses outpace the budget, it's possible to analyze differences and determine why a change has occurred. Tracking data in a spreadsheet or online accounting system improves the accuracy of the budgeting process and provides black and white support for annual expense expectations.