An entrepreneur must learn to prepare budgets and accurate financial
forecasts for their business. Your ability to set financial goals for
sales, expenses, and profits measures your ability to succeed in business.
The purpose of the budget is to provide you a view of the expected
financial results of your business activities. The budget should cover a
minimum of 12 months of business operations. You can use computer
programs that enable you to change numbers quickly, or you can use the
paper method-whichever you find easier.
A basic business budget contains four primary categories: Projected
sales and revenue; projected total costs of achieving sales and revenue;
profit or loss from operations based on sales & costs; the cumulative
total of profits and losses on a month to month basis.
The first and most important number is the estimated sales for the
month. Your ability to project this number with accuracy is a key
measure of your talent as a business person. You should have multiple
numbers for your sales estimate: High, medium and low sales. The key is
that your business should be profitable even if your low sales estimate
turns out to be incorrect. Your sales and revenue projections should be
based on experience, market analysis and research.
In the second part of your budget, you must include all the costs of
operation involved in producing and delivering your product or service.
Include all the costs of purchasing or producing the product or service,
this is know as Cost of Goods Sold. Include all operational costs of
your business including all fixed, variable and semi-variable costs of
business operation. The total number should include 100% of all expenses
necessary to reach your sales goal.
The third major number is the total profit or loss from operation for
that month. There will sometimes be months of the year where your
business loses money. In a new business start-up, the first few months
will usually show losses. It is the general sales and profit trends that
are most important.
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*The final number is the year to date profits or losses of the company.
Profits and losses are added together each month to get a total. The
monthly totals help you identify when your business will break even and
begin earning a profit. The total losses will help you identify how much
money you will have to borrow or provide to the business before it is
profitable.
