Small Business Questions & Answers


Filed under Finance

Ask About Budgets

by Delinquent in Des Moines | May 20, 2012

Subject :Planning

Dear Toolkit,

Does a budget really have any value to a small business? I know I probably should have done one earlier, but now that the pre-holiday rush is upon us, is it really necessary?


Delinquent in Des Moines

Dear Delinquent in Des Moines,

It's getting to be that time of year again. For most of our gentle readers (at least the calendar-year types), the sound of silver bells and carols and the smell of eggnog and evergreens signal that the time is nigh for that annual ritual—budgeting!

Of course the truly diligent have already completed their budgets and miss no opportunity to parade their righteousness. And those on a non-calendar fiscal schedule can procrastinate in peace for awhile. Which brings us to the rest of us. Well, misery loves company and if you've been a little lax on the budget front, hang out with us for awhile and we'll dish out some motivation and a few timely tips to get you off to a good start.

A budget—what is it?

"Our budget's like a map through a minefield of seasonal pitfalls," said Bill Kelley, president of the Goelitz Confectionery Company, creator of the Jelly Belly jellybeans made famous by President Reagan's sweet tooth in the 1980s. "How would you like to be stuck with a huge supply of little pumpkin candies in January or carloads of chocolate eggs around Labor Day?"

"We have to watch it like a hawk," Kelley continued. "Not only sales swings but seasonal raw materials pricing needs to be anticipated and budgeted for as precisely as possible. You've got to plan to succeed, and our budget map's the best kind of plan I know of." Goelitz, a fourth-generation family firm with plants in California and Illinois, ships a full line of confections world-wide, including its 40 million per day Jelly Belly production. "Our budget gives new meaning to the word beancounting," he quipped.

A budget can also be thought of as a tool for converting your plans into reality. Budgeting is a process of forecasting expectations of sales, profits, and expenses of every ilk, as well as that all important concept called cash flow.

What's it for?

Uses for a budget abound. Put on your CEO hat and use your budget to predict needs and results, determine and adjust goals, and implement strategy. Put on your CFO hat and use your budget to convince your banker that you really know what you're doing, so you'll be able to secure financing for future needs. Use your budget to keep score, to tell how well or poorly you're doing compared to how you planned to do—and to make necessary adjustments in a timely manner.

Budgeting can greatly enhance your chances for success because the process forces you to anticipate and prevent problems. Not only does it require you to give thought to the amounts of dollars needed for your operations, it can also clue you in as to exactly when those dollars will be on hand or when you might have to borrow them to keep running through a cash flow crisis.

"A small business has a greater need for budgeting than its mid-sized or large cousins because a smaller operation often has limited resources and even more limited access to capital should an unforeseen crunch occur," said Ken Yancey, Jr., executive director and congressional liaison of the Service Corps of Retired Executives (SCORE). A unit of the Small Business Administration, SCORE runs a nationwide program under Yancey's direction, advising small businesses on how to operate successfully.

"It's essential to maintain control and evaluate performance on an ongoing basis, and a budget is just what the doctor ordered for that kind of task," said Yancey, former president of the North Dallas Banking Center. "Even if a firm is currently highly profitable, budgeting is still a good investment in time as the process stimulates planning for new products, methods, and services to keep ahead of the competition," he remarked.

How is a budget prepared?

This is the part of the article where the business guru usually pontificates on an intangible animal known as "best practices." MBA-speak aside, the best practices to use in your small business are the practices that work for you. What may be a highly touted best practice for GM or IBM could prove expensive or even fatal if misapplied to a smaller firm. Best budgeting practices can range from a stubby pencil to sophisticated software.

When expressed as a kind of pro forma financial statement, a budget is useful for comparing your predictions with the actual results as they are reported by your accounting system down the road. The budget document itself is nothing more than a set of guideposts or virtual stakes in the ground against which measurements may be made.

Although many firms start their budgeting process with the bottom line and work up, the more common practice is to begin with a sales forecast. For product businesses, consider using the format of your regular profit and loss statement and dropping the projected annual sales numbers into the gross revenue section. Deduct from projected revenues the estimated direct cost of sales (like cost of goods, commissions), indirect expense (such as ads), and overhead expense (utilities, salaries, rent, insurance), net out estimated taxes, and the result is your bottom line.

If you have a small service business, add up your labor costs and overhead plus whatever amount you consider to be an acceptable profit and project your required fee revenues from that sum, taking into account the limited number of billable man-hours per year.

If you have employees, involve them in the process and get them to commit to it. A team effort in budgeting will pay off in the long run. Having employees contribute to the goal-setting process is the best way to motivate them to achieve those goals.

What form should it take?

For starters you could set up a 13-column worksheet showing line items on a monthly basis, rolled up to an annual total. Even better, add four more columns and get quarterly totals to guide you through the seasonal cash flow planning that plagues so many small businesses. If you have an abundance of line items or multiple product lines, this is where your computer spreadsheet program can be a big help. Spreadsheet programs can do your math for you in split seconds and, as a bonus, run "What if?" scenarios to let you test many assumptions accurately in a minimum of time.

If your business isn't so small anymore, some accounting software might come in handy. These miracles of modern managerial accounting come in a whole range of complexity from the very affordable QuickBooks Pro or Peachtree products to Microsoft's sophisticated integrated system, formerly known as Great Plains.

In the more sophisticated systems actual financial data can be exported into custom designed budget spreadsheets which are very flexible and can be tailored to suit every objective on every level of operations. But pencil and paper is also a form of technology that can be every bit as effective as electronic smoke and mirrors if a business owner is committed to faithfully monitoring and adjusting a budget plan.

Just DO it!

So the bottom line would seem to be that it's not important whether you use a quill pen on a cocktail napkin or a powerful program on a Pentium to plan your budget. General Dwight D. Eisenhower once said, "The planning is more important than the plan," and we couldn't agree more. It's the process that will benefit your business, not a document in a manila (or electronic) file folder.

Now go forth and draw up your plan to succeed. Even if you're not producing 40 million a day, budget those beans! Your long-term rewards will be sweet indeed.