The idea of budgeting may sound like it takes away your freedom and ability to choose how you want to spend money in your business. Many people view budgeting as a restriction on their revenue and growth, and that’s why so few small business owners prepare budgets.
However, studies prove that negativity toward budgeting can be a bit shortsighted and could hamper your ultimate success. If you have the goal of knowing exactly how much profit you want to make in a year, then budgeting can help you meet any important goals, or at the very least, it can let you know what decision you made that caused your business to fall short.
Since the word “budgeting” can be off-putting, let’s rename this whole process to “Profit Planning.” Now, who wouldn’t want to plan for profit in their business?!
Profit Planning: Starting With Revenue
When I think of traditional budgeting, I think of focusing on curbing expenses. Let’s start in another place instead. You can start with revenue or profit, then work from there, filling in the numbers you want to see on your income statement.
A revenue plan is far more important than an expense plan for small businesses grossing under $3 million in annual revenue. As a matter of fact, bringing in revenue outranks just about anything else during those first years in business, and that should be your focus.
You can build a revenue plan by listing your products and services on a spreadsheet. Use the columns for average price and quantity. Let the spreadsheet formulas do the rest by providing you with totals for each product and service as well as overall totals. Let your accountant set up this spreadsheet for you if you don’t feel comfortable working in Excel or Google Sheets.
Using this format, you can easily play “what if” by modifying the spreadsheet numbers to see the effects of price and volume changes on your revenue. Once you like the combination, you can turn it into your budget or profit plan.
Now that you have your revenue plan, you can create your expense plan, making sure it all adds up to the profit you desire.
Profit Planning: Starting With Profit
You can also create your profit plan by starting from your desired profit number first. Next, fill in numbers for revenue and expenses so that it fulfills your desired profit.
This way is a bit harder. You may want to drop in your fixed overhead expenses first (i.e. the items you must purchase in order to keep your doors open). This figure will include things like insurance, rent, utilities, wages, etc.
Fill in the rest, using your what-if strategies as you go. Work with your accountant for guidance.
At the very least, this method of budgeting makes everything very real. The give-and-take of the numbers is crystal clear when trying to make the numbers add up to your profit goal. I also think that this is the reason why budgeting is so disliked: Some small business owners just don’t want to face the reality of their numbers. However, the best business owners will embrace this tool and profit mightily from it.
The Benefits of Budgeting
I hope you’ll see that budgeting—or “profit planning” as we’re now calling it—as the amazingly powerful tool that it is. Budgeting truly affords you more freedom, not less, because you have more control over making your profit. It also allows you to be more proactive in managing your business. Try it for 2015, and watch your profits become real.
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