Formulating an accurate annual master budget for your Canadian small business can make the difference between a year of lack and one of plenty. Companies budget to create a general game plan based on sales projections and regular expense assumptions, and this also helps businesses evaluate performance for previous years during the planning period. Further, it helps a company lay out a long-term strategy for growth and expansion that builds on previous and future successes while leaving room to address potential problems moving forward.
The Importance of Accurate Forecasting
Knowing what to expect in terms of revenue and expenses serves as the mainstay of creating a yearly budget, and that makes accurate forecasting especially important. This means taking an honest look at your current budget to see where you’re meeting set goals for growth and where your business could use some work. It also means keeping up with the latest innovations and challenges within your particular field, including new disruptive technology, risking supplier costs due to weather or unrest, or the addition of regulations that effect the way you do business. To keep your business safe, err on the side of caution when estimating potential ups and downs. In other words, stay conservative when counting on potential profits and liberal when planning a cushion for potential expenses.
Laying Out Your Master Budget
A small business master budget includes both operating and financial budgets, and you need both to ensure your small business can survive and thrive throughout the upcoming year. Your operating budget comprises your company’s income statement, showing income-generating areas of your business and including both revenues and expenses. By comparison, your financial budget comprises your cash budget, figuring cash, and asset inflows and outflows. You should prepare your operating budget first, then use the data projections and assumptions to create your financial budget.
Your Operating Budget
When you formulate your operating budget, eight key elements work together to paint a picture of your business’s financial situation. First, use sales forecasting to create a sales budget that incorporates data forecasts, managerial input, and upcoming events with the potential to impact your sales. Next, set your production budget to meet the inventory requirements of your projected sales budget, but keep in mind that service-based businesses don’t typically use this schedule, as they don’t produce actual goods or keep inventory. The direct materials purchases budget includes the raw resources needed to keep your business on track, while the direct labour budget includes employee and staffing costs. Your overhead budget displays fixed and variable costs, such as mortgage payments and utility bills.
Your ending finished goods inventory budget gives everything you produce a value based on the costs that went into it, including raw materials, direct labour, and overhead expenses. In addition, the selling and administrative expense budget factors in indirectly related costs, such as office supplies and shipping or freight bills. When you finish creating all these different budget schedules, you use them to formulate your company’s income statement. Keep in mind that your operating income doesn’t equal your net income, as it doesn’t factor in interest costs or taxes.
Your Financial Budget
Three elements make up your small business’s financial budget: the cash budget, budgeted balance sheet, and capital expenditures budget. Your cash budget notes inflows and outflows of capital, including loans and investments, and you usually lay this out on a month-by-month basis. The cash budget ignores any non-cash items, including depreciation. Your budget balances sheet provides asset, liability, and equity account ending balances, while the capital expenditures budget highlights large, costly fixed assets.
Combining Data for an Accurate Overview
Once you complete all the elements for your master budget, you can use this data to get an accurate overview of the upcoming year. This is useful for positioning your small business for expansion, as it shows you where you have room to budget for extra employees, industry-specific expenses, and slack for potentially lean times. You can also use this data to better manage your cash flow and boost product development, and it can show you areas with minimized investment risks or possible issues that lie ahead. When you know how much revenue and expenses to expect in the coming year, you can better position your company for healthy growth. Be sure to keep tabs on projections and assumptions to ensure you don’t encounter surprises or miss really good opportunities for growth.
Potential Budgeting Issues
When planning ahead for the coming year, be aware of potential budgeting issues that can leave revenue flat while increasing costs or hindering growth. For instance, when you tie employee performance to compensation, staffers may slack on stated goals if they find them too easy to reach. This makes tying worker compensation to other factors rather than your master budget a good idea. Also, overly optimistic sales projections make it especially important to stay on top of related innovations and regulations while taking extra steps to protect your company’s intellectual property.
A key factor in small business success comes down to steady growth based on good planning. This makes setting estimates for revenue low while overestimating expenses a good way to ensure you don’t break your piggy bank. By using accurate forecasting to create a realistic and feasible master budget, you can potentially set your small business up for success well into the future.