We all know that budgeting is necessary, but most of us are not really thrilled with the endeavor. In most of our minds, it probably can be compared to going to a dental office for a checkup. However, the reality is that tracking your numbers is especially important for small and mid-size businesses. It is vital that you are able to meet your financial obligations, plan for any unexpected expenses that will inevitably arise, and still keep enough cash on hand as needed for investments and other business purposes.
The following are some steps that you can take to make your financial planning a little easier:
I. Determine The Type Of Financial Record That You Will Need. There are many different types to choose from. Two of the most common ones for small and mid-size businesses are the Cash Budget and the Operating Budget.
A. Cash Budget. This type of allocation provides a summary of the cash you receive (cash inflows) and the cash you spend (cash outflows) over a certain period of time. The purpose is to ensure that your business will have enough cash to fund activities for the current period of time. There are three main components that you will need, in addition to a list of your cash receipts and cash expenses, when preparing this type of financial record. These items include:
(1) The time period. Although you have flexibility on choosing the time period (whether monthly, quarterly, or annually), you should strongly consider creating your document on a monthly basis. This will enable you to compare your estimated (forecasted) numbers with your actual numbers. This is very important so that you can address any monetary issues immediately rather than waiting for a later time and running the risk of having even bigger problems to contend with.
(2) The amount of cash you want to keep on hand. The rule of thumb is to always have enough cash in reserve to cover the slower periods in your business. To be on the safe side, it is a good idea to have enough cash to cover 3-6 months or more of unexpected expenses that may come up. You may even need to save more than that; especially if you anticipate some expensive costs in the future. Obviously, you should always try to increase your sales and move your inventory as quickly as you can. However, if you have a good balance in your cash reserves that can be liquidated, along with an emergency contingency fund of (around 5-10 percent) for unexpected costs, then you should be covered if a serious issue occurs. This rule of thumb is based on conventional wisdom. However, you should be realistic in how much you can save each month after all of your expenses are paid.1
You can get free cash flow templates online at various web sites. The Service Corps of Retired Executives (SCORE) offers small business owners a wide selection of free tools that can be accessed including many financial and business templates.2
(3) You will need to provide an estimate of your future sales. It is a good idea to have multiple scenarios when estimating your future sales. Be sure to take into consideration your seasonal changes in sales when making your estimates because you most likely sell fewer items during certain months of the year. There are many different ways that you can forecast sales. For example, you may decide to forecast based on a “specified percentage over last year’s sales”. Let’s say that you believe that your sales will increase by ten percent in 2015. You would simply multiply your total 2014 sales by 1.10 to get the 2015 sales forecast.
Another option might be to do a “Moving Average”. This method averages a specified number of months to project sales for the following month. So, let’s say that you want to average the last three months of sales in order to come up with a sales estimate for April 2015. Simply add up your last three months of sales in 2015 (January + February + March) and divide by three in order to get a projected amount of sales for April 2015. A list of other forecast calculation methods can be found at the JD Edwards World Forecast Guide web site.3
In addition, there are various free online examples regarding how to prepare a forecast by using a spread sheet. One example can be found at the Small Business Chron website.4 Likewise, you can find more information regarding apps at the Entrepreneur web site.5
B. Operating budget: This type of document is an approximation of all of your estimated revenues and expenses based on your forecasted sales during a period that is generally one year or less. It typically consists of several smaller documents with the most important one being the Sales Budget. It is advisable to include an extra “cushion amount” in the event that any emergencies or unforeseen expenses arise. The “cushion amount” should be at least 10 percent of your flexible totals, and this will depend on your particular industry. Some businesses will require more “cushion” than others.
The goal for creating this operational document is to show how much profit your business can expect to make at the end of the year. It pulls together information from various areas such as customer service, distribution, design, marketing, and production. In essence, in order to create this document, you will simply start with your current revenue and subtract your cost of goods sold; then subtract your total expenses in order to see if you are showing a new profit or loss. Please refer to the bizcoach web site for more information.6 In addition, you may view an example of this financial record at the proccounting web site.7 Likewise, for a detailed list of other types of budgets, you may refer to the referenceforbusiness web site.8
II. Choose How To Prepare Your Financial Accounting. You can create your document by using a pencil and paper; inputting data on a spreadsheet or template; or you can also purchase separate software or apps such as Quicken, Quickbooks, Microsoft Money, etc.9
III. Decide To Hire A Professional. Whether you create your documents manually or use software, it is advisable to seek input from a trusted professional such as a CPA, financial advisor, or banker. In fact, you may decide to hire a CPA to prepare the financial plan for you, or you may simply allow one to advise you. Regardless of the level of involvement, getting input from your trusted advisor can prove to be invaluable in reviewing your short and long-term financial plan.
In summary, there are many tools available to simplify your financial forecasting goals such as spreadsheets, software, and apps. In addition, you also have the option of seeking the assistance of professional individuals. If you will choose to incorporate some of these budgeting tips to help balance your books, it will make your life much easier when the time comes to crunch those numbers.
1 Caron Beesley, “Managing Small Business Cash Flow”, U.S. Small Business Administration, sba.gov, updated April 15, 2013, accessed February 25, 2015, https://www.sba.gov/blogs/ managing-small-business-cash-flow-answers-10-commonly-asked-questions
2 “Business Planning and Financial Statements Template Gallery,” score.org, updated June 16, 2011, accessed February 25, 2015, https://www.score.org/resources/business-planning-financial-statements-template-gallery
3 Oracle Help Center, “JD Edwards World Forecasting Guide”, docs.oracle.com, accessed February 25, 2015, http://docs.oracle.com/cd/E26228_01/doc.93/e20706/ap_forcst_calc _ex.htm#WEAFC27
4 David Weedmark, Demand Media, “How To Calculate Sales Forecasting Using Excel,” Chron, accessed February 25, 2015, http://smallbusiness.chron.com/calculate-sales-forecasting-using-excel-29494.html
5 Jonathan Blum, “Five Best Apps To Forecast And Manage Cash Flow,” updated December 26, 2011, accessed February 25, 2015, http://www.entrepreneur.com/article/222510
6 Bizcoach, “Small Business Ideas And Resources For Starting A Small Business,” bizcoach.org, accessed February 25, 2015, http://www.bizcoach.org/budgeting-basics.htm
7 Proccounting, “Budgeting Is Important For Small Business,” updated February 25, 2015, http://www.proccounting.com/resources/business-management/126-budgeting-is-important-for-a-small-business
8 Reference For Business, Encyclopedia of Business 2nd edition, “Budgets And Budgeting,” updated February 25, 2015, http://www.referenceforbusiness.com/small/Bo-Co/Budgets-and-Budgeting.html
9 Capterra, “Top Budgeting Software Products,” accessed February 25, 2015, http://www.capterra.com/budgeting-software/