Setting a budget is a critical task in business and in your personal life. Without a budget to guide you, you won’t know whether you’re meeting your targets until it’s too late!
There are a number of good reasons to create an annual budget for your company, as noted by Osmond Vitez, via smallbusiness.chron.com:
- Getting facts—Gathering facts about your financial situation helps you to understand how much each department in your company costs, where your resources are located, and how assets are used.
- Limiting expenditures—Once you have a budget set, as much as possible you need to stick to it! Having a budget in place commits the business to following a path towards success.
- Creating a Financial Roadmap—As with limiting expenditures, your budget should be your guide to expected income and expenses. You should be able to anticipate when money is coming in and going out, allowing you to maximize your productivity and your profits simply by following the plan you’ve set out.
- Plan for Future Growth—By setting an effective budget, you can create a master plan for how growth will occur and when. Looking further down the road, you can anticipate when growth will occur and set aside the resources needed to make it happen.
How to Create an Annual Budget
A budget for your company should have a number of basic categories:
Using your competitive landscape, industry trends and historical numbers (revenue, expenses and profit) as a guide, decide on some GOALS for this year’s revenue, expenses and profit. You should compare not only the amount of each account but also the amount of the expense divided by revenue in that period. This will give you a percentage, which is much more useful when used to compare different periods in your business.
For example, if wages for January were $20,000, and revenue was $100,000, your wages were 20% of your revenue. Do that for profit as well. $10,000 profit left from $100,000 revenue is 10%. Aim for HIGHER amounts of revenue, and LOWER percentages in expenses wherever possible. Ultimately, our goal is to grow your profit—the dollar amount, but also the percentage of revenue.
This budget should be used for EVERY DECISION you make, large or small. You can use it to predict cashflow and make large strategic decisions, and to decide on giving someone a raise. You should never make another business decision without laying the revenue and expense numbers in and seeing how it affects your profit. Anytime a client asks me “should I do this?” I ask to see it in their budget.
Additionally, you MUST take your accurate financial information each month, and insert it beside your goal for that month. Then, you need to ask “did I hit this number?” and “why or why not?” This is where the power is, and the place you can make a difference. Rather than waiting until the end of the year, you can course-correct to hit your goals
If you feel you need some help creating your budget, contact TMH Business Coaching today for a confidential, free, no obligation consultation to propel you forward. Also, please feel free to add yourself to our weekly coaching tips email!