Imagine your dream vacation: You pick a destination. Flights. Hotels. Car rental. Museums to visit, shows and concerts to go to…just one minor, teeny detail left to figure out before you bring it all into fruition: the budget. Without a proper budget, you don’t have a suitable destination, flight, hotel, etc.
Same thing with your small business (although on a larger, and more stationary, level): Without a proper budget, all those grand marketing plans you may have had in your head or jotted down on paper, go right down the pipe.
Without a detailed budget plan, it will be nearly impossible for you to track and manage your finances. This is especially true for any unexpected business expenses that may come up – and there always are. And because your business is moving and growing, you can’t simply set a budget at the start of the year and leave it. You need it revisit it occasionally. If you want to keep your business running smoothly, you’ll need to have a yearly budget.
No matter what size your business is, there is a degree of risk involved. For instance, do you have employees? How will changes in their wages or healthcare requirements impact your budget? Can you afford the rent on your business space for the long run? Is there local support within reach for practical any practical assistance you may need in case of an emergency? What are the insurance costs? And last but not least: is your business located where you can get the type of customers you want?
Elements of a Budget
According to the SBA (Small Business Association), basic budgeting components include:
Sales and other revenues. Try to make these estimates as accurate as possible, but try and be conservative. The best basis for your projected sales revenues are last year’s actual sales figures. If you’re just starting out, hopefully you have done your research by following other businesses in your industry or asking other owners of businesses similar to yours.
Total costs and expenses – Once you’ve completed your sales estimates, you can come up with figures for how much it will cost your business to earn those revenues. These can be tricky because sometimes they will vary because of inflation, price increases, and other factors. Costs can be divided into categories: fixed, variable, and semi-variable.
Fixed costs: these are expenses that remain the same, whether or not your sales rise or fall. Some examples include rent, leased furniture, and insurance.
Variable costs: these correlate with sales volumes. These include the cost of raw materials you need to make products, inventory, and freight.
Semi-variable costs: these are fixed costs that can be variable when influenced by volume of business. These can include salaries, telecommunications, and advertising.
Overestimate your expenses
You need to leave yourself some wriggle room for unforeseen expenses: no two customers are the same, sometimes things don’t pan out exactly as the way you or the customer want, and a bit of compensation is needed.
Count the seasons
If your business relies more on seasonal customers (for example: as a florist, there will be a spike in business usually during holidays; swimming pool services will be more in demand in the spring/summertime; limousine services are usually reserved for special event seasons, etc.), you’ll need to bring that into your budget consideration. This is the time when you should come up to creatively market your service.
Expect the unexpected
Like in any other business small or large, or even at home, there will always be unexpected expenses: equipment breaks, supplies need to be updated, a particular service ran into some unforeseen challenges, etc. If you foresee possible expenses such as workplace renovations on updates of sorts, include them in your budget to avoid a sudden financial burden on your business. You may decide in the end not to renovate, but if the possibility exists, budget for it ahead of time.
Time is money
As a small business owner, you’ve probably found out by now that this saying is true: time is money, especially when you have employees. Even without, though, you’ll need to slice your daily pie of time into equal parts for your business and customers. You need to set deadlines (and stand by time) for projects so you can allocate time for other customers. For instance, if your business is painting, and you assure customer Y that you will start on a certain date. Meanwhile, you are still painting for customer X, and you need to be sure that you gave yourself enough leeway, otherwise you leave yourself no time to make any additions/corrections for customer X, while customer Y gets upset you didn’t show up on time, and might seriously change his mind about hiring your services.
To avoid potential clashes such as these, set your deadlines a bit later than you might think you will complete the service.
Revisit your budget
While sticking to your budget may appear financially sound, you’ll need to allow it flexibility and wriggle room for your business to grow and adapt to industry changes. Revisit your monthly and annual budgets to get a clearer understanding how your finances are working out. This will allow you to make better financial decisions because you will know more or less, based on previous months or seasons, what you can expect to spend on against how much income you can expect to bring in. This, in turn, will allow you to project what amount you can set aside for emergency or unexpected costs.
The great white big expense
It doesn’t take Captain Ahab to realize that somewhere, under the calm of your daily business, lurks a big, unforeseen expense. One way to try and avoid such whales, or at least minimize the effects as much as possible, is to study competitors in your industry and see if and when they stumbled into a large, unforeseen expense. Make sure your business is in sync as far as local tax/IRS paperwork.
Determine your marketing budget
This should include everything from fliers, bumper stickers, print ads and your online presence, including marketing campaigns (such as Google AdWords) and website.
Estimate Your Average Revenue and Expenses
Even if it’s your first time creating a budget plan, you’re probably already familiar with the basics of your business. That is to say you might already have an idea of the supplies you will need to buy, how many people you need to hire, how much you will need to pay for your office rent, electricity, and the like. Similarly, you will probably already have target and/or expected revenues per month or year. With this basic knowledge, estimate your average revenue and expenses and use it as basis for your budget plan
Consult a Professional
Sometimes, we just need to admit that we can’t do everything by ourselves. If your hands are too full with all the tasks that need to be done and goals that must be achieved for your business, then it might be beneficial to get help from a financial adviser. A financial adviser will help you:
• Get a bigger and better view of your financial status and future plans
• Better identify possible risks, problems, and solutions
• Create a more thorough financial plan and business budget
Add Expense and Profit Margins
Although you might be sure that your estimates are right on the spot, it will still be advantageous to add expense and profit margins. This way, you will still have enough money for additional and emergency expenditures.
How to Calculate your Marketing Budget
Many businesses allocate a percentage of actual or projected gross revenues – usually between 2-3 percent for run-rate marketing and up to 3-5 percent for start-up marketing. But the allocation actually depends on several factors: the industry you’re in, the size of your business, and its growth stage. For example, during the early brand building years retail businesses spend much more than other businesses on marketing – up to 20 percent of sales.
As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).
This percentage also assumes you have margins in the range of 10-12 percent (after you’ve covered your other expenses, including marketing).
If your margins are lower than this, then you might consider eating more of the costs of doing business by lowering your overall margins and allocating additional spending to marketing. It’s a tough call, but your marketing budget should never be based on just what’s left over once all your other business expenses are covered.
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