Budgeting

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Budgeting

• For a Small Business

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Budgeting Business 205Agenda

• Sat, Nov 8th
• Budgeting Advertising Promotions
• Budgeting Your Time
• Final Test

• Sat, Nov 1st
• Budgeting the Heart of Business Planning
• Why How to Budget
• The Break-Even
• The P L
• Start-up Operating Budgets

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What is Budgeting?

• Simplybudgeting is planning.
• It is developing the financial picture of your
  business.
• It is a management tool that enables you ensure
  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 dont! Many dont! But you should!
• 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.
• Give 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.
• Determine 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?

Budgeta 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

• Break/Even Analysis
• Pro forma Profit Loss Statement
• Forecasting of Sales
• Forecasting Cash Flow
• Job Costing
• Forecasting workload- staffing

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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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Common Budgeting Mistakes

• Overstating Projections- the ENRON model (and
  State of CA )- a great example of over-promising
  and not using honest money.
• Ignoring Immediate budgetary needs- when asking
  for money if you really need 50,000 dont settle
  for 30,000. Look at the lesson of the dot.coms.

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More Budgeting Mistakes

• 3. Assuming the existence of revenue means
  positive cash flow- Cash Flow 101.
• 4. Forgetting about Uncle Sam-EOD balances look
  larger when you are paying sales tax.
• 5. Mismanaging your advertising sales timeline-
  ineffective advertising budgeting.

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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
  businessthe 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 companys 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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Calculating the Breakeven

• To apply a break-even analysis you need three
  components
• Fixed Costs- Administrative Overhead (these costs
  remain constant)
• Variable Costs- COGS Selling Expenses and any
  costs that changes with volume of sales.
• Total Sales Volume

BE Point Sales Fixed Costs Variable Costs X
the 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

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Estimate or Graphically Determine Your Break-Even
through your PL

• 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 dont forget all the hidden expenses!

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Dilberts DonutsA Break-Even Treat(checkout
the Dilbert Donut PL)

• 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 Dilberts PL
• Dilberts fixed costs
• Dilberts COGs
• Dilberts 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 PL Statement

• The term pro-forma is an accounting word
  meaning projected.
• The pro-forma or PL 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 PL

• Determine the Operating Budget or Expenses
• Develop A Start-up Budget
• Add the Start-up Costs to the monthly Expenses
• Determine your projected Revenue
• Determine Your Estimated Revenue per Month
• 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 OH 2000

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Step 2 The Capital or Start-up Budget

• Start-up Costs
• Equipment 5000
• LH Improv. 3000
• Inventory 2000
• WCapital 6000
• 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 Expenses
• Rent 1,000
• Insurance 200
• Marketing 200
• Mileage 50
• Phone 50
• Supplies 50
• Utilities 50
• LOAN 350
• Draw 350
• Total Monthly OH 2350

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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 Formula
The 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 1200 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 PL
• Remember it takes time to get new clients and
  increase your billable hours

• Revenue (service)
• 50 billable hours _at_ 60 per hour
• 3000 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 bill47 hours
  per month in order to cover expenses.

• Gross Profit
• 3000
• Operating Expenses
• 2350
• Net Profit Before Taxes 650