Budgeting for a small business

Budgeting For a Small Business Budgeting Business 205 Agenda Tuesday  Budgeting the Heart of Business Planning  Why & How to Budget  The Break-Even  The P & L  Start-up & Operating Budgets Bus 205 Thursday Budgeting Advertising & Promotions Budgeting Your Time Academic Review Why Budget? • “GOALS are not just the DESTINATION you’re DRIVING toward, they’re also the painted white LINES that KEEP your on the ROAD.” • “…one of the most common reasons small businesses fail is that they underestimate the startup capital needed “ Bus 205 http://www.craftsreport.com/octo ber00/completeguide.html Budgeting helps you become a better macro-manager by enabling you to: • Borrow money Not only can you plan better for financing needs, but sharing your budget with your banker will help expedite the loan approval process • Make your craft operation more profitable and more efficient • Create a decision-making tool for key financial considerations Bus 205 http://www.craftsreport.com/octo ber00/completeguide.html Budgeting helps you become a better micro-manager by enabling you to: • Avoid investing too much money in unproductive equipment or seldom needed inventory materials • Maintain working capital needs more efficiently • set sales goals You need to be growth-oriented, not just an "order taker." • Improve gross profit margin by pricing your services more effectively or by reducing supplier prices, direct labor, etc., that affect Cost of Goods Sold • Operate more efficiently by keeping Selling, General and Administrative Expenses down more effectively • Perform tax planning • Plan ahead for employee benefits Bus 205 http://www.craftsreport.com/octo ber00/completeguide.html Time Management • Your own time may be one of the few things you can control • Several studies have shown that those who set goals are more successful and prosperous • Make it a Habit to plan on a daily, weekly, and monthly basis • “The nature of man is always the same It is their habits that separate them.” Confucius Bus 205 Tools to improve your Time Budgeting • A calendar, MS Outlook, (its free) – Use it as a Day planner – Put in your tasks – Put in your appointments as soon as you know them, or can estimate them – Use the contact list • If you are going to purchase a PDA, make sure it is compatible • Back up your work Bus 205 Prioritize Your Tasks The MUST The Should The Nice to Make sure you reevaluate these priorities Try to have three lists To Day This Week This Month Bus 205 THE TESTS OF TIME • Test of Necessity – Is it necessary or just nice? • Test of Appropriateness – Would it be appropriate to wait or delegate? • Test of Efficiency – Is there a better way? …(maybe a “work smarter, not harder” work ethic?) Bus 205 What is Budgeting? • Simply … budgeting is planning • It is developing the “financial picture” of your business • It is a management tool that enables you to start looking at the future • Would you go on a road trip without a map, without knowing what supplies you need, or where you are heading? Bus 205 10 Break- Even Point = Zero Profit Total Sales Volume Less - COGS Less - Variable Costs - Selling Expenses and any costs that changes with volume of sales Less - Fixed Costs Administrative Overhead (these ts s s o e l C a costs remain constant) e S l he iab t r Nothing left over [profit = 0] Va % * Bus 205 m e t i 19 = Break-Even Math S = to the Sales Break-Even Point FC = Fixed Costs $25,000 VC = Variable Costs $45,000 R = Estimated Revenues $90,000 S = $25,000+ ( $45,000/ $90,000) x S S = $25,000 + (1/2) x S S - ½ S = $25,000 Demo Break Even Sales= $50,000 Bus 205 20 Estimate or Graphically Determine Your Break-Even through your P&L • Review your Income Statement and determine your COGS- costs of goods sold (variable) • Know your monthly expenses (fixed) • Figure out if you increase your expenses how much product/service you will need to sell to break-even • Hint: It is easier if you are a service business, but don’t forget all the hidden expenses! Demo Bus 205 21 Dilbert’s Donuts: A Break-Even Treat (checkout the Dilbert Donut P&L) • Dilbert must figure out how many donuts he must sell in order to break-even! • Here are a few things we can figure out by looking at Dilbert’s P&L: -Dilbert’s fixed costs -Dilbert’s COGs -Dilbert’s Variable Costs Does Dilbert Break Even? If so, when? How many donuts must he sale per day (at $1.50 per donut) in order to break-even? Bus 205 • If Dilbert increases his price by 25%, how many donuts will he need to sale? 22 The Pro-forma or P&L Statement • The term “pro-forma” is an accounting word meaning projected •The pro-forma or P&L is used for a start-up business to predict future profitability of the business •It can also be used as an on-going budget, to help manage your expenses, and make sure you are on track •Projections should always be based on realistic and reasonable assumptions that can be back-up Bus 205 23 Building Your Own Pro-Forma The Operating and the Capital Budget • Operating Budget refers to your monthly ( often fixed cost) expenses or overhead • The Operating Budget shows us what we need to keep the doors open • Capital or Start up Budget refers to the total costs for opening the business • The Start-up budget is what you may need to “ Open the Doors.” • Care must be taken to factor in both budgets to make sure that your business has enough capital to start and to keep open Bus 205 24 The Steps to Creating a P&L Determine the Operating Budget or Expenses Develop A Start-up Budget Add the Start-up Costs to the monthly Expenses Determine your projected Revenue Determine Your Estimated Revenue per Month Determine Your Profit (or Loss) Bus 205 25 Determine the Operating Budget • Estimate what your needs are in order to “keep the doors open”, on a monthly basis • Make sure you “pay yourself” first either as a draw or salary (if needed) • Some expenses may be “variable” (marketing, payrolls) and dependent on your sales Bus 205 Operating Expenses Rent $1,000 Insurance 200 Marketing 200 Mileage 50 Phone 50 Supplies 50 Utilities 50 Draw 350 Total Monthly $2,000 26 Step #2: The Capital or Start-up Budget Start-up Costs Equipment LH Improv Inventory WCapital Total Start-up Bus 205 $5,000 3,000 2,000 6,000 $16,000 • Determine what you need to open the business • Make sure you a re reasonable (and ready to repay) • If you are “self-financing” think of “lending to yourself.” • If you are seeking a loan, the TPC will not all be covered 27 Step 3: Add the Start-up to the Monthly Expenses • Amortize the start-up expenses as a loan Show on your monthly expense budget • For example, your start-up costs were $16,000 If you get a loan at % for years you are paying approximately $350 per month • This becomes a “fixed expense” and increases your overhead by $350 Bus 205 Operating Expenses Rent $1,000 Insurance 200 Marketing 200 Mileage 50 Phone 50 Supplies 50 Utilities 50 LOAN 350 Draw 350 Total Monthly $2,350 28 Step #4: Determine your Projected Revenue • This is one of the most difficult areas to determine AND scrutinized the most (by lenders) • If you not have “historical” figures, base your revenue projections on realistic trade industry standards Compare “oranges with oranges • This is where accurate market research can help support your assumptions • Use an “hourly rate” formula for a service industry Bus 205 29 Hourly Rate Formula The “Hourly Rate Formula” will assist you to come up with a realistic billable rate in the service industry The rate should be close to the industry standards and have an “attainable” amount of billable hours It is rare for service professionals to have more than 1,200 billable hours annually The Billable Rate will help determine your Maximum income per month Bus 205 30 Step 5: Determine your Estimated Revenue per month • Base your revenue on Revenue (service) billable hours per month 50 billable hours @ $60 • Add the amount to the per hour revenue (top section) of the P&L $3,000 per month gross • Remember it takes revenue time to get new clients and increase Ask yourself, can I your billable hours realistically that amount of work? Bus 205 31 Step 6: Determine Your Profit (or Loss) • Determine how many hours you need to work a month to break-even • In this case our Consultant needs to bill 47 hours per month in order to cover expenses Bus 205 Gross Profit $3,000 Operating Expenses $2,350 Net Profit Before Taxes $650 32 Group Work • • Create a set of Assumptions Percentages for your dream company Such as Rent What to add to direct wages? What to add to direct costs? Where did you look for help? Bus 205 33 ... need to make? • Can I afford a loan? • Will I make money? • When can I afford to go out to eat? Bus 205 17 The Break-Even Analysis • A key component of a Financial Plan is the Break-Even Analysis... rate should be close to the industry standards and have an “attainable” amount of billable hours It is rare for service professionals to have more than 1,200 billable hours annually The Billable... of the business •It can also be used as an on-going budget, to help manage your expenses, and make sure you are on track •Projections should always be based on realistic and reasonable assumptions