Your Guide to Small Business Budgeting with Outright

                       If you’ve dealt with small business finances for any length of time, you’ve probably heard the phrase “Cash is King.” What that term really means is having cash on hand when you need it is the key to success or failure of most small businesses.  A budget for your business is a great way to help manage when you receive cash in your business… and when you spend it.

                   If you are the type of person that just cringed, because I mentioned the “B” work, you will be happy to know that Outright actually makes creating a budget a lot less painful.  Most business budgets are nothing more than an educated guess of what your revenue and expense will be each month, for the coming year.  The good news is if you have been using Outright for the previous year or more, you have the starting point for you budget.  Go to the reports tab and select the Profit and Loss report. Most budgets are prepared based on monthly numbers, so select to view the report by month.  While it is great to prepare a budget for an entire year, the truth is you can choose any time period you would like to work with by selecting the ending month of your historical report.  Select the update button to make sure you are viewing your report based on the criteria selected and then scroll to the bottom of the page and select the export link.

 

    

Profit and Loss

Export will download your monthly profit and loss information to an Excel spreadsheet like the one above.  If you don’t have Excel, you can also read this report in a free version of Google Docs or Open Office.  It will help if you are somewhat familiar with using a spreadsheet, so if you have never worked with Excel or other programs like it, there are great resources online to help you learn how spreadsheets work.

When you open the spreadsheet you just downloaded, you will see all of your revenue lines at the top with all of your expense categories below.  I suggest the first thing you if you have more than one line for sales or revenue is insert a line to total all of your revenue lines for each month.  You can see the TOTAL line I added to the example above.

Next take a look at your expense categories and think about the types of expenses that you put in each category.  You should find that there are two ways to categorize all of your expenses.  The first choice is some expenses are variable, meaning as your sales go up or down, these expense also go up or down.  Items like PayPal fees, shipping fees and cost of goods sold, will typically fall into this category.  Other times will be more fixed and not change much from month to month.  These would be expenses like rent and web hosting.

To create a budget for your variable expense, you need to calculate what the ratio of each variable expense is to sales.  You do this by adding up the yearly total for that expense category, then dividing that number by the yearly total of your sales.  You might want to take your spreadsheet and insert a column next to the expense category names to type in this ratio for each of your variable expenses.  For your fixed expenses, you can just write the average monthly expense in this column.

Now you have created the basic framework for what your budget will look like.  The problem is you still have your numbers from last year in the spreadsheet.  Here is where you have to do some good “guesstimating.” Start with your sales figures and estimate what your think your sales will be for the next 12 months.  Looking at your historical sales, you will probably see that certain months tend to be better than other months and for most businesses this type of seasonality does not change much from year to year.  Replace your historical sales numbers with what you think your sales will be for the coming months.  This is typically the hardest part of creating a budget, because you are dealing with the future and no one knows for sure what will happen, but don’t stress about being too accurate.  You will probably find that the more experience you have budgeting for your business, the better you will become at making these estimates.

Once you have your revenue figures, expenses are usually easier.  Using the ratios we calculated above for variable expenses you can project your variable expense by multiplying your ratio amount by what your projected sales are for each month.  If you know how to do formulas in a spreadsheet these types of calculations are one of the reasons spreadsheets can be such a powerful business tool.  For the fixed expenses, you simply copy your average monthly expense across for each monthly column.

You may notice that at the bottom of your report you have a Profit/Loss line.  Outright actually hardcoded your amount in this line when you downloaded the original spreadsheet, so the last thing you need to do is change this Profit/Loss line to a formula that takes your total sales and subtracts all your expense lines.  Copy this formula across for each month and you can see what your projected profit and loss is for each of the future months and by adding across for each month, you can project your income for the year and that is your new budget.

While we know the numbers in your budget are based on estimates, it can be a very powerful tool to make some “what if” calculations.  Say you think increasing advertising $1,000 per month will increase revenue by 10%.  Using the budget spreadsheet it is easy to adjust your budget and see if spending that extra money might result in more profit for your business.

You can also use your budget numbers to compare to other similar businesses.  BizStats.com has average financial ratios for over 500 different industries, that you can compare to your business.  As you progress through the new year, you can also use the profit and loss reports from Outright to check yourself and see how good of a job you did in budgeting.  By continuously updating and refining your budget, you should find that you do an even better job of managing the financial success of your business.