Recently, I went through the home building experience. Anyone else who has gone through this process knows that there were many ups and downs. But all in all, it was incredible to see something drawn on paper turn into a real, tangible building. I still remember looking through lots of sets of plans and customizing it to fit what we wanted the end product to be. Then, as we went along and would visit the construction site, if something seemed like it was going in the wrong direction, we would consult our blue prints to see what the plan should be.
Why am I telling you all of this? Well, when I asked my team about topics for upcoming blog posts, budgeting was one of the top responses. As I sat down to outline what I wanted to say on the subject I realized that what I was describing was actually a business “blue print”, the plan I can consult to see if what we are doing is steering us in the right direction.
Planning, accounting, costing, making financial arrangements, budgeting. Whatever word you use creating a budget can sometimes seem daunting, but really it can be empowering. It may sound like a cliché but knowledge really is power. The reality is, your small business financial position is what it is. Not knowing or working without a budget does not change the situation. In fact, not knowing can put you and your business in serious peril.
The good news is, some basic information is all you need to get started.
- Profit and Loss Statement - Your company’s Profit and Loss Statement summarizes your revenues, costs and expenses over a certain period of time, typically over a quarter.
- Balance Sheet- The Balance Sheet is the difference between what you own and what you owe, your assets versus your liabilities. (Want to know more about Profit and Loss and Balance Sheets? Check out our blog post: You Can’t Have One Without the Other.)
- Trial Balance – Your Trial Balance gives you a window into your accounts. It shows you all your debits, credits, assets and liabilities on one document.
If you are just getting started in your venture, and don’t have these documents created yet, make sure you know your incoming cash flow, your general business expenses (rent, utilities, office supplies etc.) and production costs.
Once you have all this information, it’s time to analyze it to see where your business stands. The quickest way to do this is by creating a spreadsheet, to the right is an example of how to set up something simple. If you are currently using accounting software, there should be pre-built reports to help you generate something similar.
Now that your budget is created and you can see your cash flow, it’s time to put it to good use. Try looking at different what-if scenarios.
- What if you negotiate less rent?
- What if you hire 2 employees?
- What if your top client leaves?
Being able to manipulate your budget with different scenarios will help you better plan for the future and set realistic production goals. It will also help during those unforeseen challenges, by showing you a plan to go forward.
With your budgeting blueprint, you will be able to see how and when you can grow your business and start to anticipate when certain challenges will arise. Just like with our home blueprint, we can see how by doing x will affect y. Here is wishing your budget helps you build solid business.
If you are struggling with building an effective budget, we can help.