How to Build an Annual Budget for a New Business
It is very important for founders to create a plan that includes numbers (score keeping) to determine if your business is headed in the right direction. I compare a budget to a pilot preparing a flight plan. The pilot sets out the course so that he arrives at his destination. The pilot may correct course as time passes to respond to outside influences such as weather, winds etc. So should a business owner respond to outside influences and manage the business to hit its targets.
Annual budget or financial plan?
Sometimes business people will interchange the words budget and financial plan.
To me a budget implies limits and more related to expenses. A financial plan incorporates revenues and expenses and is like a pilot’s flight plan sets out the course for success.
The time to prepare a financial plan will vary with the complexity of the business and the founder’s business acumen. However, a founder should probably allow a couple of hours at a minimum to work on a plan. Sometimes a founder will engage someone that is familiar with financial statements and accounting to assist them with preparing a plan. The plan will translate what the business wants to accomplish into numbers.
Start with the data you’ve collected.
A financial plan generally starts with data that the founder has. This could be a couple of months of actual activity or it could be based on the founder’s experience. It is best to ground the plan in some data that exists and generally won't be disputed. Then the business owner will add assumptions based on research or experience. The goal is to prepare a projected Income Statement also known as a Profit and Loss statement. The income statement accounts for sales made and money spent (cash in and cash out).
When planning revenues for the year I would recommend planning conservatively. It is nice to exceed your revenue plan, but it can be very challenging if you miss your revenue plan. Keep in mind that there may be differences in timing between when you make a sale and when you collect the payment. In some businesses this time difference is substantial, in others there is no difference.
How much will it cost?
When planning expenses there are many types of expenses to plan for. Major expenses usually include costs for personnel (salary, business taxes, health benefits) and marketing efforts (collateral, social media, professional help). Other expenses to think about include subscriptions for business systems to run the business (Quickbooks, website hosting, CRM systems, payroll) and professional services for legal, audit, accounting and tax preparation. And also include estimates for business travel, mileage, office rent if needed and general supplies that will get consumed.
It is best to switch from a spreadsheet to a record keeping system such as Quickbooks when you have both revenues and expenses. These systems help organize your data so that you can manage your business and have the information needed to give to your tax professional when you are ready. These accounting systems help you provide professional looking invoices to your customers and can help you keep track of amounts due to you if you sell on account.
Founders should consider comparing their actual results to their plan at least once a quarter.
This way adjustments can be made along the way to help get the business on track. For example you don’t want to realize you are overspending on marketing without resulting sales at the end of the year, when you could adjust your marketing efforts earlier to positively impact results.
Founders remember that you are the expert on your business. The goal of the flight plan (financial plan) is to help you stay on track. And, it is probably worth engaging a knowledgeable accounting person to help you get started if you find the project overwhelming.