Budgeting for a small business

The #1 Budget: The Break-Even• The 1st budget you should prepare is one that can help you determine the feasibility of your business…the break-even • When all the figures are together yo

Budgeting

For a Small Business

 Budgeting Your Time

 Academic Review

Why Budget?

• “GOALS are not just the DESTINATION

you’re DRIVING toward, they’re also the painted white LINES that KEEP your on

the ROAD.”

• “…one of the most common reasons small businesses fail is that they underestimate the startup capital needed “

Budgeting helps you become a better macro-manager by enabling you to:

• Borrow money Not only can you plan

better for financing needs, but sharing

your budget with your banker will help

expedite the loan approval process

• Make your craft operation more profitable and more efficient

• Create a decision-making tool for key

financial considerations.

Budgeting helps you become a better micro-manager by enabling you to:

• Avoid investing too much money in unproductive

equipment or seldom needed inventory materials

• Maintain working capital needs more efficiently

• set sales goals You need to be growth-oriented, not just

an "order taker."

• Improve gross profit margin by pricing your services more effectively or by reducing supplier prices, direct labor,

etc., that affect Cost of Goods Sold

• Operate more efficiently by keeping Selling, General and Administrative Expenses down more effectively

• Perform tax planning

• Plan ahead for employee benefits

Tools to improve your Time

Budgeting

• A calendar, MS Outlook, (its free)

– Use it as a Day planner

– Put in your tasks

– Put in your appointments as soon as you

know them, or can estimate them

– Use the contact list

• If you are going to purchase a PDA, make sure it is compatible.

• Back up your work

Prioritize Your Tasks

THE TESTS OF TIME

– Is there a better way? …(maybe a “work

smarter, not harder” work ethic?)

What is Budgeting?

• Simply … budgeting is planning

• It is developing the “financial

picture” of your business.

• It is a management tool that

enables you to start looking at

the future.

• Would you go on a road trip

without a map, without knowing

what supplies you need, or

where you are heading?

Why do Small Business Owners

have to budget?

• You don’t! Many don’t! But you

should!

• Many small business owners

manage their businesses in a

relaxed way and “trust” their

instincts

• But as a business grows, it only

makes sense to “have control” on

your business assets, cash flow and

profitability

• Budgeting is a tool of management

control and planning!

A Budget can help you…

• Ensure that you have the money for

future activities (or survival).

• Control your finances and make sure

you have adequate working capital.

• Gives you the confidence you need to

make financial decisions.

• Enable you to save money or

“internally finance” for the future

growth of your business.

• Keep control of your expenditures.

What Can You Do with A Budget?

• Determine if your venture is

• Validate the activities you planned

- can you afford to hire?

- should you advertise here?

- should you purchase this equipment?

- should you lay-off workers?

Budget…a translation of

your business plan into

numbers.

The Budget as a Guideline

•After the period of budgeting is

complete, you can compare actual

revenue & expenses with your

anticipated goals

•If you are planning for increase

profits, a budget will allow you to

visualize the “variable” expenses

with your growth

•A budget, most importantly, helps

to keep you on track, so you

can meet your goals!

Common Budgeting Tools

• Forecasting of Sales

• Forecasting your Expenses

– Pro Forma - Profit & Loss

Statement

• Break/Even Analysis

– Forecasting Cash Flow

– Forecasting workload- staffing

• Job Costing

Additional Budgeting Tools

• Start-up or Capital Funds

The #1 Budget: The Break-Even

• The 1st budget you should prepare is one

that can help you determine the feasibility

of your business…the break-even

• When all the figures are together you will

have many questions answered…

• What sales will I need to make?

• Can I afford a loan?

• Will I make money?

• When can I afford to go out to eat?

The Break-Even Analysis

• A key component of a Financial Plan is the

Break-Even Analysis

• The Break-even Point is when the

company’s cost match the sales volume

• By analyzing our sales (or potential sales)

and expenses we can calculate the

minimum level of activity we need in order

to make a profit

• This also helps us determine our pricing

strategies and helps to keep control of our

expenses

Break- Even Point = Zero Profit Zero

1 Total Sales Volume Total Sales Volume

2 Less - COGS

3 Less - Variable Costs - Selling

Expenses and any costs that

changes with volume of sales.

4 Less - Fixed Costs -

Administrative Overhead (these

costs remain constant)

5 Nothing left over [profit = 0] Va ria ble

Co sts

* th

e S ale

s

Estimate or Graphically Determine Your Break-Even through your P&L

• Review your Income Statement and determine your COGS- costs of

goods sold (variable)

• Know your monthly expenses (fixed)

• Figure out if you increase your expenses how much product/service you will need to sell to break-even

• Hint: It is easier if you are a service business, but don’t forget all the

hidden expenses!

Demo

Dilbert’s Donuts:

A Break-Even Treat

(checkout the Dilbert Donut P&L)

• Dilbert must figure out how many donuts he must sell in order to break-even!

• Here are a few things we can figure out by looking at Dilbert’s P&L:

-Dilbert’s fixed costs -Dilbert’s COGs

-Dilbert’s Variable Costs

Does Dilbert Break Even? If so, when?

How many donuts must he sale per day (at $1.50 per donut) in order to break-even?

The Pro-forma or P&L Statement

• The term “pro-forma” is an accounting

word meaning projected.

•The pro-forma or P&L is used for a start-up

business to predict future profitability of the

business.

•It can also be used as an on-going budget,

to help manage your expenses, and make

sure you are on track.

•Projections should always be based on

realistic and reasonable assumptions that

Building Your Own Pro-Forma

The Operating and the Capital Budget

• Operating Budget refers to your monthly

( often fixed cost) expenses or overhead.

• The Operating Budget shows us what we need

to keep the doors open.

• Capital or Start up Budget refers to the total costs for opening the business.

• The Start-up budget is what you may need to “ Open the Doors.”

• Care must be taken to factor in both budgets to make sure that your business has enough

capital to start and to keep open.

The Steps to Creating a P&L

1 Determine the Operating Budget

or Expenses

2 Develop A Start-up Budget

3 Add the Start-up Costs to the

monthly Expenses

4 Determine your projected

Revenue

5 Determine Your Estimated

Revenue per Month

6 Determine Your Profit (or Loss)

Determine the Operating Budget

• Estimate what your needs

are in order to “keep the

doors open”, on a

monthly basis

• Make sure you “pay

yourself” first either as a

draw or salary (if needed)

• Some expenses may be

“variable” (marketing,

payrolls) and dependent

on your sales

Operating Expenses Rent $1,000

Insurance 200

Marketing 200

Mileage 50

Phone 50

Supplies 50

Utilities 50

Draw 350

Total Monthly $2,000

Step #2: The Capital or Start-up

• Determine what you need

to open the business

• Make sure you a re reasonable (and ready to repay)

• If you are “self-financing” think of “lending to

yourself.”

• If you are seeking a loan, the TPC will not all be

covered

Step 3: Add the Start-up to the

Monthly Expenses

• Amortize the start-up

expenses as a loan

Show on your monthly

expense budget

• For example, your start-up

costs were $16,000 If you

get a loan at 9 % for 5

years you are paying

approximately $350 per

month

• This becomes a “fixed

expense” and increases

your overhead by $350

Operating Expenses Rent $1,000

Insurance 200

Marketing 200

Mileage 50

Phone 50

Supplies 50

Utilities 50

LOAN 350

Draw 350

Step #4: Determine your Projected

Revenue

• This is one of the most difficult areas to

determine AND scrutinized the most (by

lenders).

• If you do not have “historical” figures, base your revenue projections on realistic trade industry

standards Compare “oranges with oranges.

• This is where accurate market research can help support your assumptions.

• Use an “hourly rate” formula for a service

industry.

Hourly Rate Formula

The “Hourly Rate Formula” will assist you

to come up with a realistic billable rate in the service industry.

The rate should be close to the industry

standards and have an “attainable” amount

Step 5: Determine your Estimated

Revenue per month

• Base your revenue on

month

• Add the amount to the

revenue (top section)

of the P&L

• Remember it takes

time to get new

clients and increase

your billable hours

Revenue (service)

50 billable hours @ $60 per hour

$3,000 per month gross revenue

Ask yourself, can I realistically do that

Step 6: Determine Your Profit

(or Loss)

• Determine how many

hours you need to

$650

Group Work

Percentages for your dream company.

1 Rent

2 What to add to direct wages?

3 What to add to direct costs?

Where did you look for help?