I’m not going to lecture you about the virtues of a business budget. You know they’re important, and you know that your business should create one for the upcoming year. (Or you wouldn’t be reading this article.)
The purpose of this blog is to make planning a budget for your SMB simple. Because what keeps many companies from actualizing this “good business principle” is fear. One of those common and debilitating fears is that business budgets are a time-suck and too complicated.
No more excuses. Here’s how to get started on planning your SMB’s budget for 2018.
Work Backwards: “What did I do last year?”
Planning a business budget is working backwards. It’s a common mistake to start planning a budget in the future (i.e., creating a profit margin for the new year).
Don’t start with next year’s profit margin. Planning a business budget is also like algebra. You’re trying to solve for the unknown value of x—the projected profit margin for next year.
It’s also important to break down everything by month. An effective budget is a used budget, and you want your 2018 budget to metaphorically be dog-eared and coffee-stained from heavy use. By breaking down your budget into months, you can return to your budget at the end of every month to compare the “actual” with your “budget.”
How to Determine 2018’s Profit Margin
1. Calculate Last Year’s Net Income
Add up everything your company earned in 2017. If you have been in business for more than a year, look at your net income over the past few years to find a yearly average.
2. Determine Your Fixed Costs
These are the monthly bills your business pays each month. A handy freshbooks article provides some “fixed cost” examples to help you identify these expenses:
- Employee Salaries
- Phone System
- Accounting Services
- Legal Services
- Cleaning Services
Account for Price Changes. Be aware of any price changes in your fixed costs. If rent is being raised in 2018, use that new amount for 2018 projections. It may actually be a good idea to go and talk to all of your service providers to see if there will be any price changes in the coming year. You don’t want any surprises.
Shop to Cut Costs. As you are calculating these numbers, evaluate where you can cut costs. For example, our company Jive has helped hundreds of SMBs cut yearly costs by switching from a legacy PBX business phone system to Hosted VoIP. If you’re working on your budget and you’re trying to find a way to cut down on costs, check out how much Hosted VoIP can help you save in 2018.
Calculate: Add up your 2017 fixed costs—including any 2018 adjustments in prices—to find how much your company will pay in fixed costs every month.
3. Identify Your Variable Costs
As the name suggests, these are the costs that vary. For example, during your busy season in 2017, you may have hired two contract workers for three months. This is classified as a variable cost. As the needs of your company and the market change, your variable costs will rise and fall throughout the year. Here are a few more examples of variable costs:
- Raw materials
- Contractor wages
- Printing services
- Office Snacks
- Office Supplies
Account for Price Changes. Take into consideration any price changes that are going into effect in 2018. For example, if printers are now charging 3 cents a copy instead of 2 cents. Substitute these price changes into the raw data from 2017. So take the number of copies you made each month, and multiply it by the new 3 cent cost.
A final word of advice: be conservative and round up with variable costs.
Calculate: Find the total of variable costs for each month. Because these costs vary, each month will have a different projected variable cost. i.e., January 2018 will not have the same projected variable cost as March 2018.
4. Predict One-Time Spends
There are some one-time spends that you can predict—that Thomas Kyd’s dinosaur of a computer will need to be replaced sometime during the year. And there will be one-time spends that you can’t necessarily predict, but it’s a good idea to set aside discretionary funds for those emergencies in 2018. If you can’t think of what kind of emergencies may arise, just look over the past few years to find what kind of unexpected expenses came up.
- Holiday Party
5. Do the Math
Add up your yearly fixed costs, variable costs, and predicted one-time spends. This is the total cost. You’ve solved for x—next year’s projected profit margin. Now you know how much you’ll need to make to stay in the black for 2018.
It’s Spreadsheet Time!
An annual budget isn’t complete without a spreadsheet. Input all of your data into a budget template. There is no shortage of business budget templates online, but I would recommend this article to download SBA’s template.
What You Learn from Annual Budgets
- Funds needed for my operation
- Start up costs if it’s a new business
- Estimate for labor and materials
- Revenues necessary to keep things going
- Relative estimate of expected profits
What you learn from a business budget will cause some serious introspection about the viability of your business. Along with hitting at the viability of your business, a yearly budget will help you realize market opportunities and expose your past weaknesses. It will also help you strategize ways to cut costs, set profit goals, and limit unnecessary spending.
With all those brilliant insights, we can conclude that what you learn from creating next year’s business budget is worth the time and energy. If you’re afraid of the complexity of planning next year’s budget, remember that you don’t need a finance degree. You just need an article, like this one, that makes planning a business budget straightforward.