Setting an Annual Budget for your Business

Posted on February 12, 2012 by Leo Sun

 

For a new company, the annual budget is among the first things you should set up – that is, if you expect your company to last for at least a year. There are two main components – cash flow and expenses.

Cash flow is not the same as profits. Profits are simply sales minus expenses at various reporting periods. The cash from profits sometimes has to be used right away to stock an inventory in advance. Cash flow refers to cash on hand that is readily available to pay the bills every month. A positive cash flow is extremely important for a startup business. While businesses can operate at a loss (revenue less expenses) for awhile, they can’t operate for more than a month or two with a negative cash flow. With a negative cash flow, your utilities will be cut and the repo man will come knocking on your door. If you see your cash flow about to go negative, rush to the bank to negotiate a line of credit or take out a loan, or better yet, do so before you foresee an issue.

Once you have positive cash flow, calculate your monthly income and deduct your regular expenses. This can be done with a variety of software, such as Excel or Money.

Common monthly expenses include rent, insurance, payroll, utilities, inventory purchases and office supplies. These can be inputted as recurring monthly payments. Less predictable expenses can include repairs, maintenance, company vehicles, travel, sales, marketing and outside services. Instead of entering these as recurring charges, set aside a monthly budget for each. If the monthly budget is not used up, then it is saved into your cash flow.

If you deduct the expenses from your cash flow and the number is positive, then your budget has been balanced.

But how can we optimize the budget? For starters, check it monthly and review it at meetings. Point out unusual discrepancies from month to month to help you identify wasteful expenditures. For example, many offices have now gone paperless, after realizing the cost of regular A4 paper had been weighing down on their bottom line. It’s sometimes just that simple.

Studying the budget monthly can also help you catch dishonest employees who have been stealing from the company. This is particular noticeable in the restaurant industry, where theft of food products is increasingly common.

Other solutions aren’t as obvious at first. You can outsource employees or entire departments – such as accounting, human resources or administration, to save utility and supply costs. Allow employees to telecommute on certain days to cut down on electric bills.

After examining your budget with a fine-tooth comb, you can concentrate on increasing your product margins. Once your company is past the awkward early years of low cash flow, you will be ready to optimize your supply line with distributors, so they can move larger amounts of inventory at a lower cost. All of these will help make your annual budget cleaner and more cost-effective. Revise your budget regularly, but not too often. Once every three months should be more than enough. You can overhaul the entire budget annually.