Author, speaker, pastor and leadership coach John Maxwell said “Tell your money where to go, instead of wondering where it went”, referring to the practice of “creating a budget”. With this quote, Maxwell beautifully shows why budgeting is essential for anyone who wants to be in control of their finances. If that is you, but you don’t have a budget yet, here are a few pointers to help you in telling your business dollars where to go (same principles apply for your personal budget):
Anticipate Your Income for the Month
Review the sales from the last few months and consider any changes in your marketing, operation or business seasonality, and conservatively anticipate the revenue the business can expect for the next month. The number you arrive at, are the dollars you are going to direct (tell where to go) in the next steps.
Set Aside Savings or Profits First
Just like in personal finances, you set aside the savings first before the dollars disperse and evaporate. Even if it is a small amount to start, set aside a portion of your income to a separate business bank account to either help you build an emergency fund, a capital fund, or build your profit first.
However, only do this if your business is up to date in its obligations with vendors, providers and lenders. Otherwise, any extra dollar you have should go to ensuring those obligations are current first.
Determine your Cost of Sales
These are the costs you’ll have to incur to produce the items and/or to deliver the services that generate the income. Usually, as the sales go up, the cost of sales increases as well. Determine this number and subtract it from the expected monthly revenue.
Determine your Overhead Expenses
These are the expenses you must pay every month regardless of how much you sell. Similar to a personal budget, you have a cost of housing, food, transportation, etc every month, regardless if you were on vacation and were not home to enjoy, or if you used your car or stayed home all month. You’d still have to pay your rent or mortgage or your car insurance and payment. The same goes for your business. You’ll likely already know what these are: rent, utilities, subscriptions, payroll, marketing, etc.
You can look at your historical bank statements or financial reports to make sure you have not missed any items due next month. Once you have these numbers, subtract them from your expected revenue for the month
Build for Contingency
A budget is your best estimate of the income and expenses in the future, but things could change so it’s important to leave some wiggle room for unexpected costs (keyword: unexpected). When you’ve been setting aside some savings and have built a more sizable emergency fund, and as you are more comfortable with your monthly budget, this step might be omitted, as you’ll know you’ll be ready to tackle the truly unexpected costs from the emergency fund.
Balance Out to Zero
After setting apart the dollars for savings, cost of sales, overhead expenses and contingency (if applicable) from the expected revenue for the month, you’ll either have a surplus or a deficit in your budget.
If it is a surplus, then set aside those extra dollars towards savings (help build your emergency fund, capital investment fund or increase profits faster, or pay down debts).
If it is a deficit, go back and review what expenses and costs you can cut to ensure you don’t have a deficit.
The goal is to have a zero at the end of the budget, and that is when you know every dollar you expect has a name and knows where to go.
See How It Went
At the end of the month turn back and see where the business dollars went, compared to your initial budget. Chances are that for the first 2 or 3 months, you’ll be off in a few areas, but you’ll get better and better at it every time.
As you review how your dollars were spent versus how you budgeted, you’ll start to see opportunities to cut costs to improve your take-home prize (your profits!). If you’d like to explore more about ensuring you take your profit first, you can check out our previous session with Susane Mariga, author of Profit First for Minority Business Enterprises.