1.7A WHY BUDGET?
1.7B WHAT IS A BUDGET?
Budgeting is simply balancing your expenses with your income. It’s far more common than you’d think for business owners not to realise that they’re overspending and slowly sinking deeper into debt each year. Budgets provide an overview of financial activities including assets, liabilities, equity, income, expenses, and costs over a specific period. Think of it as a planning tool. Use it to reach your goals by determining how much money you can spend on different elements of your operation.
1.7C FINANCIAL STATEMENTS
The three essential documents that you will need to understand are as follows.
- Profit and loss statement. This shows where your company’s money came from, and where it is now, and how much revenue has been earned over a specific period. This report is important to the value of your business because it shows your profitability.
- Balance sheet. This represents the company’s financial position at the end of a specific date, including assets, liabilities, and equity.
- Cash flow statement. This statement shows inflows and outflows during a specific period.
A budget is a living document. This means budgets need to be flexible, as businesses shift and change every day. You may receive an unexpected discount from a vendor, your sales may exceed your estimates for any given period, you may incur unexpected fees or sales may drop without warning. Successful businesses are able to predict, adapt and compensate for twists and turns.
Assess your budget monthly in order to compare your actual results to your planned results, and to make any necessary changes.
A profit and loss statement includes the following.
- Listing of all sources of monthly income, including sales and interest.
- Listing of all required and fixed expenses, like rent/mortgage, utilities, and phone bills.
- Listing of other possible and variable expenses.
1. Create a profit and loss statement.
2. Create a cash flow statement.
3. Create a balance sheet.
- Every founder needs to have a basic understanding of accounting, regardless of whether they enlist help.
- Budgeting is simply balancing your expenses with your income. If you spend more than you earn, you will have a problem.
- Assets are things the company owns such as inventory and accounts receivable.
- Liabilities are things the company owes such as money they owe to their suppliers (accounts payable), bank and business loans, mortgages, and any other debts.
- Equity is the ownership that the business owner and any investors have in the business.
- Review your budget monthly, quarterly and yearly and then Rinse and Repeat.
- Have fun with your budget. You are the master of the puzzle!
- Assets – Liabilities = Equity
- Income – Cost of Goods Sold – Less Expenses = Profit (NOT cash in the bank)
What are your monthly fixed and variable expenses?
- Gather information on your fixed expenses each month. These are expenses that don’t change and aren’t dependent on the number of customers you have.
- Then add variable expenses. These are expenses that will change depending on the number of customers each month.
What % of income do these represent?
- Estimate monthly sales. This is the most difficult part of a budget because sales for a new company are unknown. You might want to execute three different sales projections:
- Best case scenario, in which you show your most optimistic estimate for first year sales
- Worst case scenario, in which you show your least optimistic scenario, with very little sales during the first six months to a year.
- Likely scenario, which is somewhere in between. The likely scenario would be the one to show your lender.
If this information is bamboozling, read it a few times over, then seek advice and assistance – hire an accountant or contact us at Navig8Biz.
It’s important to highlight here that a business account should be separate from your own personal account. If you haven’t opened a business account, now is the time to do so. It’s surprisingly common for business owners to mesh their personal and business finances which can cause obvious problems. When selecting a bank for your business account, do your research to find out how and whether this institution will help you grow, and keep in mind any fees and penalties that may apply.