“Failing to plan, is planning to fail”
Preparing your annual budget is probably one of the least appealing aspects of being an entrepreneur, but you don’t do your business — or its customers — any favours by putting it off. Following these five simple steps can help make the process a little less painful.
1. Count your chickens.
Before you start allocating resources, you need to understand what they are. This includes not only the amount of your income, but also the nature of that income.
2. Get with the program — costs.
With the input of key people in your business, determine the current costs and what your business expects to offer in the coming year. Be careful not to underestimate needs. Make necessary adjustments to the previous year’s expenses for inflation and other higher costs that may disproportionately affect your profitability. For example, if petrol prices are rising quickly and you rely on vehicles to deliver products or services, expect your expenses to be considerably higher in the coming year.
3. Pay attention to other expenses.
List your direct expenses, breaking them down into specific line items. Payroll is probably the largest item. Add to current salaries any expected salary increases and payroll taxes and benefits. Incorporate any legally mandated changes to benefits, such as those arising due to strike action. Other direct costs may include rent, e-tolls, supplies, equipment maintenance, insurance and transportation.
Don’t forget to account for indirect expenses as well.
4. Play with the numbers.
What you have at this point is a rough draft. You’ll need to make at least some adjustments to your numbers, assumptions and plans before getting to where you want to be.
Be sure to compare your budget to the previous year’s budget as well as to the actual results, paying attention to large variances. An unanticipated one-time event might explain going over budget, but if you don’t have that excuse — and have gone over budget repeatedly — you probably need to be more realistic about your income and expenses.
5. Ask for direction.
Don’t hesitate to get assistance if you need it. Professional accounting help is always a good idea, but it is critical when:
- It is the first time you have prepared an annual budget;
- Your business is struggling financially;
- Your business is growing rapidly or has undergone major changes;
- Your business saw significant variances between last year’s budgeted and actual results; or
- You don’t have financial or accounting expertise in-house.
If you’re uncertain, get expert advice. After all, your annual budget is the first step toward current and long-term financial stability.