Don’t spend the rest of your #SMB life eating Ramen Noodles. 4 Steps That Will Change The Way You Think About and Approach Budgeting.
Honestly, choosing to write an article about business budgeting was not easy. Much of my pre-small business owner career revolved around creating corporate budgets, forecasts, and five-year plans that tied to company strategic goals. I understand the topic completely, but writing about it so that readers would stay with me to it the bitter end was the difficult part!
The importance of creating a budget for business is not a “fun” topic nor is it “Ha Ha’ entertaining; But, I’ll try to combine a bit of both plus provide some budgeting know-how!
Many business owners cringe when I mention the word budget in the same breath as strategy. 🙂 Usually, I hear an “Ugh,” followed by fear, panic, and confusion.
However, in order to run a successful business, strategy and budgets are a necessary evil. Budgeting makes the difference between living the Fillet Mignon life or living on Ramen Noodles. (Now, you understand the graphic!)
As a small business owner, you might think, “Well, I don’t need to plan and budget like a corporation.” And you’re half right; a budget doesn’t need to be complex or difficult!
Regardless of the size of your business, planning your business goals in terms of dollars enables you to understand the financial health of your business.
Granted, a corporate budget is highly complex with many sources of income and expenses, but the fundamental process, dollarizing your goals, is the same whether you are 80,000 or 1-10 people strong.
In this article we’ll look at a couple of steps to help you get started, and, hopefully, provide a few ideas so that CAN live the Filet Mignon life you envisioned!
STEP 1 – The basic principle: set your strategic goal(s) and dollarize them as sources of income or expenses.
Start with basic questions. “In 2015 I want to _______________________.” Fill in the blanks as many times as necessary to capture each of your business goals.
Examples goals might be:
- Grow my business X% (we’ll be using this example)
- Spend more money on advertising and marketing initiatives
- Take more training courses
- Expand my business into a new area
- Add a new product or service
Write down each goal you want to achieve. Leave a space to add in the resources you’ll need to accomplish them.
Now that you know WHAT your strategic goals are, HOW will you accomplish each goal?
We’ll use the example goal of Grow My Business X%. How much do you want to grow? You need to be realistic, but if you want to grow, include a bit of a stretch.
According to Entrepreneur:
small business growth of 20 percent is outstanding growth, 7-8 percent per year is higher than average, the average yearly growth factor for small business is 3-5%.
Let’s look at how you add this goal to your budget. Your business is on track to achieve $25,000 (Revenue or Total Sales) in 2014. You’ve looked at the market trends for your industry and feel confident that you can grow 3%, but decide to take a more optimistic approach and add a stretch goal of 5%. The math says:
$25,000 * 1.05 = $26,250 (target Revenue with 5% growth)
In other words, in 2015, your Revenue should increase by $1,250. To increase Revenue something needs to be added to generate Sales: more clients, services, products, more SOMETHING.
Step 2 – Review Current Year Income and Expenses First, look at your current year history of income and expenses, they will provide the basis for creating your 2015 budget. (You should already have this information for tax purposes)
Step 3 – Dollarize Your Income Budget
Next, consider ALL billable sources of income. Here is a screenshot of possible Income Sources to consider.
Other Income Considerations:
Backlog – Contracts that have client income extending from one calendar year to the next contribute to your backlog. If a portion of the contract is pre-paid, it is Funded Backlog. Include both types of backlog in your budgeting.
New Starts – Perhaps your business submitted and won a proposal with a start date after December 31, 2014; forecast new starts as an income source in the month you anticipate the contract starting. If the start slides to the right, move your income estimate accordingly.
Leads – Have new leads but haven’t touched base with them? Now is the time to figure out how you will convert these leads to Sales and include them as estimates in your budget.
TIP: How to quantify leads. Our corporation forecasted sales (we called them Bookings) using a method called weighted values (WV). In order to minimize wins and losses in our revenue estimates, each lead (booking) was assigned a weighted value. The “weights” ranged from 20% (low probability) to 90% (high confidence). For example, A $2M (full value or FV) opportunity with low win probability might be weighted at 20% for a sales projection of $400K. If we did not win the opportunity, the impact to our budget was not the $2M full value but the weighted value of $400K.
It’s important to include new leads in your budget with a realistic analysis of the probability of winning. The probability dollar value of a win (the weighted value) is what I would recommend including in your budget.
Products – Includes Sales from products where you have a purchase order in hand and forecast estimated sales from products using your 2014 history. If you are planning to offer an Ebook for example or Paid Training include this estimate as part of your Income.
Step 4 – Dollarize The Expense Side. Below is a screenshot of some of the possible expenses your business may incur.
Using the strategic goal of Grow My Business, the next step is dollarizing expenses that are essential to achieving the goal.
All businesses incur routine monthly expenses; use your historical data to add in known (ongoing) expenses. To achieve a stretch goal like Grow Your Business 5%, go back to Step 1 and review your resources to reach your goal. Perhaps you need to increase advertising dollars or need more training. Estimate the COST of growing your business; remember you can update this information as you move along in the budget cycle.
Expenses may include:
• Marketing Expenses
• Travel Expense (not included in a specific contract)
• Business Lunch
• Membership Dues
• Yearly Domain and Hosting Services (Web services)
• Tools (for example paid subscriptions to tools for premium services used online)
• Training – Paid webinars, seminars, conferences
By this point, you have all the data pieces you need to create a budget.
There are a number of tools available to create a framework for your budget. The framework may be a simple Excel spreadsheet, an online tool like QuickBooks, or purchased accounting software. I happen to use QuickBooks Online for my accounting and budgeting. Score has a number of Excel financial templates here and here. Microsoft has a variety of downloadable templates here.
The other advantage of using tools is that most include canned reports like Profit and Loss, Cash Flow reporting, and Budget vs. Actual.
Take note, if you use an accountant to keep track of your business income and expenses, a budget is STILL a MUST. Your accountant is a source of raw data for your budget but is not part of the strategic process! YOU are the person that needs to drive strategic and financial planning!
Now that you have a handle on income and expenses, enter all your data in your tool, review year-end totals to determine if your strategic goals have been quantified as dollars.
One final thought. A few months ago, I was reading a comment written by someone interested in taking a paid course offered by a social media professional. Another reader in the thread had written she couldn’t afford the cost; her training budget was depleted. The first commenter wrote back she didn’t have the money either but “just use a credit card.” OUCH. Not a good way to run a successful and healthy business.
The key in budgeting is to use it as a living tool to help you understand the financial health of your business. A budget will show you if you are on track to achieve your overall strategic goals or if Ramen Noodles will still be part of your menu!
Over to you! Do you dollarize your budget to match strategic goals? What software tools do you use?