Creating and Sticking to Your Small Biz Budget

Pam Newman has some excellent tips for getting in your finances in order. Whether you are just starting out or are a biz pro, these tips are helpful and quite easy to follow.

Creating a 12-Month Budget By Pam Newman

Get your finances in order for the entire year with these steps for preparing a monthly budget.

It's that time of year! Have you started your budget for the new year? A budget is part of your financial roadmap. How do you know where you're going if don't have a destination selected and the road that you're going to take mapped out?

Budgeting shouldn't be approached as something to do when you have time, but instead as a priority and part of your overall business financial management plan. Breaking your budget into monthly increments will ease the process, making it less overwhelming. Prepare some general goals for your financial budget for the year, then see how you can achieve that goal--one month at a time--through a monthly budget.

Getting Started
Budgeting doesn't have to be an overwhelming task. We'll often use the excuse that we don't know "how" to do a budget because our income and/or expenses are too hard to predict. Don't you want to have an idea of where you're going? The challenge for the new year is for you to be more proactive with your business financial picture. Here's how to begin.

1. Analyze your current and prior year(s') budget. It's always a good idea to know where your starting point is!

Utilize a simple format for your budget based on the profit/loss format:

Income
- Cost of Goods Sold
- Overhead Expenses
= Net Income/Profit

Don't get confused though! Cash and income are two different concepts.

2. Use the budgeting features in your bookkeeping software to assist you. QuickBooks has a great budget format ready for you based upon your profit/loss format.

3. Assess your budget realistically. It's always a good idea to have an objective third party review your information. We tend to overestimate our income and underestimate our expenses.

Make sure to document how you're coming up with your estimated numbers. For example, if you predict $10,000 in sales, you need to document that it's based on the following equation: the number of sales multiplied by dollar amount per average sale. This will give your predictions substance and allow better variance analysis when your actual figures vary from your budgeted figures.

4. Compare your actual activities to your budgeted activities on a monthly basis. This comparison is what creates the real value for you. When you use QuickBooks, you'll have preformatted reports available that'll calculate variance between actual and budgeted income and expense items.

We all have many demands on our time, but managing the financial aspects of our businesses is a responsibility that we need to take seriously. If this isn't one of your strengths, then find someone to assist you with this process. It's like any other skill--it takes time to understand the various aspects. There's no better time to take control of your business path than today!

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Pam Newman is Entrepreneur.com's "Financial Management" columnist and president of RPPC Inc., which helps entrepreneurs succeed in their businesses through small-business training and consulting services in the areas of accounting and management. She's also author of Out of the Red, a management accounting guide for small-business owners.

Now that Newman has given us these fabulous budget prep tips, we need advice on how to stick to the budget!!! This is where Jeff Wuorio comes in. Below is an article from Wuorio explaining how to stay with your budget ---

8 ways to make a budget work by Jeff Wuorio

If you build it, stay with it.

Put another way: If you've put in the work and created a business budget, follow it! If you don't, you'll lose the benefits that you planned for when you built the little monster.

Get started by reminding yourself that your business budget is not a monster. It's nothing more than a set of guidelines for your spending and saving habits. Below, I've laid out some common problems that pop up with many established budgets, along with some solutions that can help you stay within budgetary guidelines.

1. Accept the learning curve. Living with a budget is an education. Trimming your expenses, knowing how long a paycheck is going to last or how much of a cash reserve to keep around . . . working these skillfully will take some time. But you can learn to adjust a budget as you go, and what was once a shot in the dark gradually will become a more predictable and useful practice.

2. Be prepared to miss your budget estimates and act accordingly. This was rule No. 1 in setting up a budget: knowing that your budget projections are a best guess and nothing more. Notes Mark Weaver, associate professor of management at the University of Alabama: "You're going to miss your estimates. That doesn't make you unintelligent or a bad businessperson. Instead, try to miss them intelligently and in ways you can correct."For example, if you budgeted $200 a month for long-distance phone service and your bill consistently tops $250 — say, for at least three months running — adjust your phone allocation up $50. By the same token, if the bill is only running an average of $150, you can trim your phone share. To keep things in line as much as possible, try to reallocate some other area of your overall budget to account for the adjustment.

3. Work flexibly. As with setting up a small-business budget, sticking by one often boils down to a willingness to be flexible. For instance, if your revenue doesn't match what you expected — and there's a good chance that might be the case — trim back your expenses to compensate. By the same token, if you're taking in more than you anticipated, it might be time to invest in better equipment.

4. Watch your cash flow. If you want to stick to a budget, make sure that your inflow more than compensates for your outflow. Monitor your income closely to make certain that you'll have adequate funds to pay your bills, particularly if your business is prone to long lapses between paychecks. Notes Weaver: "Even if it's just from the left pocket to the right pocket, cash-flow problems are what kill most small businesses. Keep checking to make certain that your revenues match your expenses."

5. Err on the side of conservative. When setting up your budget, it's a good idea to overstate your expenses and lowball your expected revenue. That approach is also a solid strategy when making sure your cash flow is going to hold up. Look into budget savers such as telephone calling plans, less expensive office furniture and other ways to lessen the burden on your income. "People always feel they have to have the best computer," says Weaver, "but money you don't spend is money you don't have to earn."

6. Nurture a cash cushion. The uncertainty of budgeting — both in terms of income as well as expenses — stands as one of the biggest threats to the survival and success of any small business. While trimming expenses to the absolute bone is always a good idea, it's also prudent to set aside income whenever possible. If you can afford it, earmark a portion of every paycheck you get and sock those funds away in a money market account. Not only can that money come in handy for predictable expenses such as year-end taxes, it also can prove an absolute lifesaver should an unexpectedly high bill suddenly crop up.By contrast, if you're thinking about starting a business sometime in the future, start saving — the money you set aside now ultimately may bail you out in ways you can hardly imagine.

7. Check your budget every month. This is a point that I cannot stress enough. Go over your budget every month and examine your cash flow to make certain your available funds are sufficient to meet your liabilities. If you're following point No. 2, above, and adjusting your budget as you go, you'll have some sort of emergency fund to take care of monthly overruns. Use it when things cost more than you thought and put money into the contingency fund if you come in under your expected numbers.

8. Use your budget as a form of restraint, not constraint! Setting up and sticking to a solid budget is the most effective teacher of fiscal discipline there is. But don't be shy about busting your budget on occasion should something truly warrant it. It's often impossible to budget for a valuable last-minute seminar or a trip to a trade show to make valuable contacts. If you are too rigid with your budget, you'll refuse to spend when you really should. "Don't be afraid to go beyond your budget to spend money that's a valuable investment in your business," Weaver says. "A good budget is great, but don't let it dictate your business."

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Jeff Wuorio is a veteran freelance writer and author based in southern Maine. He writes about small-business management, marketing and technology issues.