By Nick Kolbenschlag, Crown Wealth Group
Running a small business can be extremely rewarding but includes challenges. One of the most important aspects of your business planning is also one of the toughest, and most owners ignore it all together. I’m talking about budgeting. If you just cringed hearing that word, relax, this article is intended to give you some tips to get your budget set and keep your business’ cash flow on track.
By creating a workable budget, you can track cash on hand, expenses, and the revenue you need to keep your business growing – or at least going. When you take the time to put the numbers to paper, you increase your chances of tracking them to ensure your business succeeds, helping you anticipate future needs, spending, profits and cash flow. Proper budgeting also allows you to identify problems before they become major issues, giving you the ability to course correct in real time. Your budget should be updated monthly with the actual revenue and expense numbers so that you’ll know if you’re on target or if you need to adjust to maintain your profitability.
It is important to be as realistic as possible when building a budget. Everyone would love to double their sales annually, but the odds of that happening are slim. When projecting monthly revenue, it would be wise to use your previous 12 months as a guide. Unless you’ve made investments in growth (new marketing, better people, improved technology, upgraded equipment, etc.) it is hard to argue that you will experience high growth in your revenue production. When rounding your revenue goals, it’s best to round down. Over shooting your target would help increase profitability but missing your production numbers and hitting your expense numbers could spell trouble.
Once you’ve got your sales estimates in place, you will need to determine the expenses associated with creating that revenue. Your expenses can be categorized into 3 sections: fixed, variable and semi-variable.
Fixed costs remain the same regardless of your sales production. Examples include rent, loan payments, leased equipment, and insurance.
Variable costs are linked to the service you provide and sales volume. Examples include utilities, cleaning solution, hangers, and delivery costs.
Semi-variable costs are fixed but can be variable based on volume of business. Examples include salaries and advertising.
When calculating your operating expenses and setting your individual category budgets, it’s best to use your prior year financial statements as they will show you what you’ve done historically. When setting your expense budget, it is best to round up. If you spend less than budgeted, you have increased profitability.
When you subtract your estimated expenses from the projected sales figures, you will be left with your estimated gross profit. If the number is not what you were hoping for, you’ll need to find ways to increase revenue production, decrease expenses, or both.
Getting your first budget in place can be a difficult task but once you do, you’ll have a much better understanding of your business and can plan for the profitability that you seek. If you stick to updating your budget monthly, resetting your annual budget will become easier and more accurate. When you know your numbers, you have a higher chance of creating the success you seek
As a Personal CFO, Nick Kolbenschlag is responsible for the coordination of all aspects of his client’s financial life and accountable for them achieving both their business and personal life goals. Prior to launching Crown Wealth Group, he joined GCG Wealth Management to build out their Personal CFO division and remains their Director of Personal CFO Services. He earned his Bachelor’s degree in Finance, with a minor in Accounting, from North Carolina State University. He can be reached at Nick@crownwealthgroup.comand his company website it www.crownwealthgroup.com.
NOTE: This item originally appeared in the Fall 2018 issue of Caroling Clean, the newsletter of the North Carolina Association of Launderers and Cleaners, a DLI state affiliated association.