A business’s budget is the single-most important asset. It is the ‘make it or break it’ point. Yes, you need great marketing, a team who believes in you, and an amazing product or service. But, if you don’t have a budget and know how to use it, none of this will ever matter.
In my consulting career, I have had small business owners and CEOs of nonprofit organizations walk into my office with a box filled with every receipt and they are extremely proud of themselves. They have kept every receipt and know exactly where their money has been spent. Or do they?
Two key pieces to success are your budget and your cash flow sheet.
Starting with budgeting, I like to break a budget into four parts: Cost of Goods Sold/Made or Services Provided, Revenue, Payroll, and Expenses. Working with smaller pieces, it is easier to be more accurate and to dig into the details.
You do not need accounting software to create a budget. In fact, I prefer building my budget outside of my accounting software. The first time you walk through this process, it will take you a few hours. But here’s the good news: each coming year, you will simply copy the file and update. Creating an accurate budget will literally take you an hour using once you have the setup.
Before you dig into the data, you will create a workbook. Each year’s budget, whether you are a fiscal or calendar year, will have its own workbook. If you decide you use this method starting in September, and your year ends Dec. 31, 2022, start 2023 and each new year will have its own workbook. You want to keep as much historical data as possible, and create systems to help you accurately predict revenue. You will have a minimum of seven sheets: Cost of Goods Sold, Revenue, Payroll, Expenses, Unabridged Budget, Abridged Budget, and Cash Flow Sheet. Break any of these areas into multiple sheets for ease of use.
Cost of Goods Sold
Whether you buy wholesale and resell, create a product or offer a service, this area will contain each and every expense needed to produce the product or service. Each item or service you sell should have its own budget. For example, if you own a bakery and you are calculating the cost of the items you sell, each cookie, muffin, and cake will have its own budget. Similarly, for every service you provide, you will create an individual budget. Let’s say we want to calculate the COGS for making a batch of peanut butter cookies. You are going to calculate the cost for an entire batch of cookies. List every ingredient used in column A. In column B list the quantity of each ingredient. Column C will contain the cost of each ingredient. Should you need to break down costs of ingredients to get accurate amounts, use columns D and E for this. In the next column, calculate the total cost for each ingredient. Once this is completed for each ingredient, total each column. You now have the total COGS for a batch. Divide the total COGS by the number created, and you will now have the total per item. Repeat this process for each item you sell. If you purchase wholesale, list the item, wholesale price, retail price, and shipping cost.
Calculating the COGS for services provided is slightly different. There are websites where you can research the average hourly rate for a service similar to what you provide to help you set your final hourly rate. But for this process, it’s vital you use accurate numbers and list every service you provide. Under each service, include what it takes to provide that service. Utilities and rent are overhead items and are not included here. This list is only what you need to provide the services. For example as a consultant, I need a program subscriptions to provide my services. I list these under each service that uses them and the monthly subscription cost. Break things down as needed, but don’t start dividing a subscription amongst services. List the entire cost of a subscription under each service. Finally total, and this will give you your cost to provide the service.
Once you have calculated your COGS, create a grand total.
The next step requires the most honesty.
Revenue
In my experience, people grossly overestimate the amount of revenue they are capable of producing. If you have past years’ data, pull it out. On average, your revenue will only increase by 3% annually. When calculating your revenue, you must be honest with yourself.
For each employee who generates revenue, you should only calculate 20 hours of revenue generation per week. In a 40-hour workweek 20 hours a week are filled with administrative duties, meetings, and travel. In reality, you can only truly expect to produce revenue on average 20 hours a week. Using this calculation, you can predict your revenue for the coming year.
Payroll
Payroll is often the area of a budget where the most overspending happens. As I tell my clients, if you do not calculate for overtime, pay raises, bonuses, and new employees, you cannot add them mid-year. Remember to calculate all payroll taxes, benefits, and overtime for each employee. If you plan to hire a new employee, add them to the budget. And most importantly, add yourself! Your pay must be calculated into the budget.
Expenses
These are any and every cost it takes to operate your business. List each separately so that in years to come that you can see the fluctuation in prices.
Once you have each section completed, you are going to copy and paste the entire section into the unabridged budget. To determine your profit, you will add the COGS, payroll, and expenses together, and subtract the total from revenue. When you compare your total profit to your total expenses, you should have a profit margin of 10% to 15%. This is the money you will use to reinvest in your business, expand, attend training, anything that will add value to your business. You will also use some of this to create a 90 Days of Operational Cost. This single-line item has saved me more times than I can tell you. Having 90 Days of Operational Costs creates cash flow when needed, and gives you an account to borrow from in slow months.
Weekly and monthly Cash Flow Sheet are easy to calculate and the key to managing your budget. List annual revenue, annual expenses. Break these down to monthly and weekly amounts. Your weekly revenue amount is what you must make in order to break even at the end of the year. You can monitor sales throughout the week and make adjustments to expenses as needed to make sure you obtain this number, or at a bare minimum, make the exact amount of your weekly expenses.
Budgeting can seem overwhelming, but using this method will help you take control back of your budgets.
Sara Orellana is an independent entrepreneur who specializes in strategic planning, leadership, and grant writing. She can be reached at sara@3raptorconsulting.com.