Budgeting and Your Small Business

“I have always thought that one man of tolerable abilities may work great changes, and accomplish great affairs among mankind, if he first forms a good plan, and, cutting off all amusements or other employment’s that would divert his attention, make the execution of that same plan his sole study and business.” - Benjamin Franklin (1706–90)

Many business people run their businesses without a planned goal… by the seats of their pants. In trying to survive from week to week and from month to month, such people overlook an important management tool, budgeting. Budgeting can help just as a map helps you to keep on the right road.

Budgeting is a tool for dealing with the future. It helps you turn expectations into reality.

An increase in profit should be the first consideration when you think about the prospect for your business in the next year. Making a profit is the ONLY reason for being in business! Working up a budget helps you to determine whether or not your profit goal is within reach.

 Why Budget
A budget is a plan that enables you to set a goal and list the steps that are necessary to reach that goal. Thus, a budget helps you think about what you want your business to do in the future. By planning, you are in a better position to act to prevent crises.

In its simplest form, a budget is a detailed plan of future receipts and expenditures - projected profit and loss statement. Thus, once the period for which you have budgeted is completed, you can compare actual results with anticipated goals. If some of your expenses, for example, are higher than you expected, you can start looking for ways to cut them. Conversely, if you have fallen short of your goal, you may want to look for ways to increase your income.

Budget makers can start either with a forecast of sales and work down or with a forecast of profits and work up. Most businesses use the latter method. In other words, you decide what profit you want to make and then list the expenses that you will incur in order to make that predetermined profit.

 A Plan For Increased Profit
Before you can use a budget as a plan for increased profit, you have to be sure that your present profit is what it should be. In a business, the year-end profit should be large enough to make a return on your investment and a return on your own work-pay.

Value Of Owner's Service.
Skilled crafts people who own businesses are kidding themselves if their firms' profits are less than they can earn working for someone else. Your net profit after taxes should be at least as much as you can earn if you worked at your trade for a weekly pay check.

Return On Investment.
The year-end profit is too low it does not also include a return on the owner-manager's investment. That investment includes the money you put into the firm when you started it and the profit of prior years which you left in the firm - retained earnings

Your Targeted Income.
After you know what you made last year, you can set a profit goal for next year. Be sure that your goal includes a return on your services and a return on your investment.