In our last post we spoke about Budgets and how helpful they are to a business. In this post we are going to explain how to build one.
There are two main sections to a budget; The Income and Expense sections.
We like to use your chart of accounts as the basis for the budget and budget across all the areas in your chart of accounts.
A side note here. Critically assess your charts of accounts. We see charts of accounts that are overly detailed and so cumbersome that the reports they generate are pages long and lose their impact as people are overwhelmed by the information.
Income can be projected based on what you already know, such as recurring orders from clients or estimated conservatively based on historical information or income modeling based on your strategy. An example of that... Historically you may have had an average of X number of sales with a sales price of Y. You can use this information to base numbers for 2021 on…. Your desired sales number x Y. Other things that should have been considered in your strategy planning: Are you still relevant in your offering? Can the market bare a higher price?
Some income sources have a direct cost associated with them. For example if you sell merchandise. If you sell a t shirt for $20 and it costs you $5. It is simple enough to calculate the sales and associated costs of that sale.
Expenses fall into a couple of categories the main two of which are Fixed and Variable. Fixed costs remain the same regardless, such as rent and salaries. Variable costs can fluctuate, such as the costs of merchandise… this cost will depend on how many t shirts you buy.
Expenses can be further split into Direct and Indirect costs. Direct costs are the costs incurred to produce a sale. Eg if you are selling classes, the cost of the teacher is a direct cost as the sale wouldn’t happen without them. Similarly the cost of the t shirt from the earlier example, the sale won’t happen if we haven’t bought the t shirt.
Indirect costs are generally the costs of administration and things that are shared by the entity as a whole.
In calculating the actual expenses for the budget, you can use some of the data from the prior years as a foundation but we prefer business owners to assess each and every expense where possible, getting up to three estimates for a product or service so that they can accurately estimate what it's going to cost in the upcoming year.
The first draft of the budget should include everything you dreamt of as a result of the strategy session.
When the information has been collated, you can see where the organization sits. You may need to revise your budget if it is not supporting your strategy.
Budgeting can seem like a daunting task, however it is a valuable tool for your business and once you have done it the first time you will see the value and it will be easier in year 2 :)
The team at Handle It are experienced at preparing budgets. If you have questions or would like some help to prepare one for your business, please reach out to us at 833-202-7676.