Budgeting is an important tool for many small businesses. This should help us turn expectations into a reality. Unfortunately, many business owners don’t really prepare their annual budget. In this situation, many people would wonder why they don’t meet their financial expectations. In this case, business owners should make sure that their budgeting task is appropriate and their budgets should be reviewed. It may take some effort to develop real budget. In many cases, it is better to have a simple list for projected expenses and revenue. In this case, business owners will know how much they can allocate for routine operational tasks and for development requirements, such as expansions and for buying new tools.
Once the list for daily, weekly, monthly and annual expenses have been created, it will be much easier to define net profit. For small business owners, net profit is equal to take home pay. It means that business owners won’t take too much money for their business, which could progressively cause cash flow problems. Business owners will also be able to make proper choices on different discretionary items and they will be able to change their priorities. As an example, they can lower the thermostat in the office room or use coupons to purchase office supplies or raw materials. With proper budgeting, business owners will know how to effectively reduce costs and this will increase net profit or take home pay. It should be noted that tax obligations and debt repayments should be included as expense components.
As the current fiscal year starts to wind down, business owners could evaluate ways to increase their net profit. The new profit goal can be more achievable if small business owners have set up proper budgeting at least for the entire fiscal year. Budgeting will take some extra efforts, as an example, we should collect all variable and fixed costs for the previous fiscal year. This will allow us to make a more accurate prediction for the costs of the next year. Both the variable and fixed costs will tend to increase in value. There are different examples of fixed costs, such as salary, property tax, rent, insurance, equipment depreciation, building maintenance costs, interest on debt and others. Despite being called fixed costs, it is quite likely that some of them may increase. As an example, landlord may decide to increase the rent for this year.
Variable costs fluctuate with the volume of sales. The raw material and cost of labor are the biggest factors. Delivery costs, payroll taxes and sales commission will also get bigger as the sales volume increase. As comparison, fixed costs components, such as insurance, rent, salary, interest on debt on others are not affected by the sales volume. By incorporating more accurate components of fixed and variable costs, we should be able to ensure a much more profitable business. In this case, we should analyze data and make some proper assumptions. This is an essential factor when we want to create real budget.