Budgeting For a Small Business. Bus 2052 Budgeting Business 205 Agenda Tuesday Budgeting the Heart of Business Planning Why & How to Budget The.

Budgeting For a Small Business

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Budgeting Business 205Agenda

Tuesday Budgeting the Heart

of Business Planning Why & How to

Budget The Break-Even The P & LStart-up & Operating

Budgets

ThursdayBudgeting

Advertising & Promotions

Budgeting Your Time

Academic Review

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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. “

http://www.craftsreport.com/october00/completeguide.html

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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.

http://www.craftsreport.com/october00/completeguide.html

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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.

http://www.craftsreport.com/october00/completeguide.html

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Time Management• Your own time may be one of the few things

you can control.• Several studies have shown that those who

set goals are more successful and prosperous.

• Make it a Habit to plan on a daily, weekly, and monthly basis.

• “The nature of man is always the same. It is their habits that separate them.” Confucius

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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

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Prioritize Your Tasks

1. The MUST do2. The Should do3. The Nice to doMake sure you reevaluate these prioritiesTry to have three lists1. To Day2. This Week3. This Month

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THE TESTS OF TIMETIME

• Test of Necessity– Is it necessary or just nice?

• Test of Appropriateness– Would it be appropriate to wait or delegate?

• Test of Efficiency– Is there a better way? …(maybe a “work

smarter, not harder” work ethic?)

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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?

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Why do Small Business Owners have to budget?

• You don’t! Many don’t! But you shouldshould!

• 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!

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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.

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What Can You Do with A Budget?• Determine if your venture is

feasible!• Plan future receipts and

expenditures.• Look for the weaknesses in your

plan. • 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.

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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!

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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

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Additional Budgeting Tools

• Start-up or Capital Funds Budget

• Operating Budget• Marketing/Advertising Budget• Personal Financial Budget• Statement of Needs• Use of Funds (when applying for

loan)• Time Management Budget

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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?

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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.

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Break- Even Point = ZeroZero Profit

1.1. Total Sales VolumeTotal 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] Variable Costs

item = %

* th

e Sales

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Break-Even Math

S = to the Sales Break-Even Point

FC = Fixed Costs $25,000

VC = Variable Costs $45,000

R = Estimated Revenues $90,000

S = $25,000+ ( $45,000/ $90,000) x S

S = $25,000 + (1/2) x S

S - ½ S = $25,000

Break Even Sales= $50,000 Demo

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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

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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?

• If Dilbert increases his price by 25%, how many donuts will he need to sale?

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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 can be back-up.

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Building Your Own Pro-FormaThe 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.

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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)

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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

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Step #2: The Capital or Start-up Budget

Start-up Costs

Equipment$5,000

LH Improv. 3,000

Inventory 2,000

WCapital 6,000

Total Start-up $16,000

• 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.

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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 ExpensesRent $1,000Insurance 200Marketing 200Mileage 50Phone 50Supplies 50Utilities 50LOAN 350

Draw 350Total Monthly $2,350

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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.

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Hourly Rate FormulaThe “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 of billable hours.

It is rare for service professionals to have more than 1,200 billable hours annually.

The Billable Rate will help determine your Maximum income per month.

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Step 5: Determine your Estimated Revenue per month

• Base your revenue on billable hours per 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 amount of work?

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Step 6: Determine Your Profit (or Loss)

• Determine how many hours you need to work a month to break-even.

• In this case our Consultant needs to bill 47 hours per month in order to cover expenses.

Gross Profit$3,000

Operating Expenses$2,350

Net Profit Before Taxes $650

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Group Work

• Create a set of Assumptions Percentages for your dream company.

• Such as1. Rent

2. What to add to direct wages?

3. What to add to direct costs?

Where did you look for help?