Setting Up Your First Operating Budget
The key to creating a workable first budget is to keep it as simple as possible. Experienced business owners know they can’t predict a lot of key line items—like income, for example—with more than 80% accuracy. As such, you only need to make your best guess, and err on the conservative side so you can keep your cash flow in the black.
It’s also a good idea to keep the number of budget categories to a minimum. It’s important to track the cost of office supplies, for example. But does it help you to know how much you spend on printer paper or toner?
Different businesses will have varying requirements. An environmental consultant might have just one service, so there would be no point in tracking sub-categories of consulting fees. That assumes new business comes from referrals. But suppose this business focuses on two vertical markets—banks and hospitals—and advertises in trade journals for both industries. Knowing how much revenue comes from each channel could be important information in allocating the advertising budget.
Keep It as Simple as Possible
A retail business that sells many different products, such as a hardware store or a wine shop, probably needs to track a lot more information than a consultant does. Plumbing or electrical? Italian or French? Light switches or extension cord? White or red? Both business types may need to track information on suppliers, mark-ups, number of units sold and the time it takes to sell them. Inventory management can be endlessly complex; some businesses can get by with ballpark numbers for budgeting purposes, while others will prefer a more granular approach.
The key point is that tracking and recording data can be time consuming and, therefore, costly. That’s why it’s important not to track more data than you can actually use. The least expensive system for tracking budget information is a ledger book, with entries written out by hand. A consultant with very few, large projects can easily manage with this centuries-old approach. At the same time, the cost of business accounting software, whether it’s an Excel spreadsheet or a Quickbooks database, is negligible.
Templates Are a Good Starting Point
There are many budget templates available that you can use as a starting point. Just choose the categories that apply to your business—or modify the template as needed. For each category, fill in the projected number. Things like rent, salaries, the cost of Internet connectivity, and phone service are easy to predict and likely to remain stable month-to-month. Taxes and insurance premiums are often paid annually, and these lump-sum payments can have a major impact on cash flow. It’s a good idea to budget so that you’ll have cash on hand at the time these payments come due.
Finally, there are expenses that you can’t predict, such as legal fees, equipment replacement costs, or the need to hire a new employee. If possible, include a category for contingencies. These are difficult to estimate the first time out of the gate, but with time and experience you will get better at predicting how much you need to set aside for “unpredictable” expenses.