All small business owner/managers are extremely busy and face the same issues that big businesses face except for the scale of business. To ensure that the business is progressing as desired, the budgeting process is essential to achieve success. But it must be remembered that budgeting is a planning process and should allow for flexibility in operations rather than become a rigid document that must be adhered to.
Additionally, a budget based on traditional financial accounting methods can be limiting while a realistic budget based on actual operating conditions can be very insightful and productive.
Every business has only two things to manage and monitor: Income and Costs. Income is basically a guess based on historical patterns and knowledge of current market conditions. Costs, however, are much more variable and require some forethought to be meaningful.
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The easiest budget to complete is the general overhead plan. Most costs are known and fairly fixed for a year or more. Rent, utilities, office staff, and data processing costs can be estimated with reasonable accuracy and should be reflected accordingly with allowances for growth or problems.
2. Costs of Goods and Materials
Too often, the cost of goods budget reflects only the direct cost of goods and raw materials but should actually reflect the total cost of ordering, freight, handling, and warehousing of these critical items.
3. Cost of Sales
One of the most critical costs to budget is the cost of generating the revenue and this requires an accurate understanding of the sales force. Some salespeople generate large volumes of sales but at low margins while others may generate lower sales but at significantly higher margins. Knowing how your sales force produces sales can make a big swing in the operating revenues a manager has to work with. Acknowledging this difference in the budget process can make a major difference.
4. Cost of Production
Like sales, different employees work at different rates and efficiency. Understanding these differences can make a significant impact on actual operations of the company. A slow but methodical employee may not be the best choice to perform a fast track, low margin project while a fast but less methodical employee may not be best suited for an important project where performance and customer satisfaction is critical. A simple fact is that redoing work or callbacks are the most expensive production costs a business can have. Like the cost of sales, knowing and budgeting for different productivity rates can have a major impact on the bottom line.
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5. Fudge Factor
Every successful business should budget for unexpected opportunities or expected but unclear events. Money budgeted for travel to a new and lucrative potential customer is wise. Money set aside for special industry events or advertising possibilities could be money well spent. All of this is discretionary but can be built into the plan. It can be used or saved as the priorities of the moment dictate.
Every business is different, but whether it is a retail store, specialty equipment and Service Company or a manufacturing facility, the budget for a business should be based on historical reality but adjusted for actual costs of doing business. Planning smart makes working smart much easier and more productive.
Mark Long is a real estate agent broker in Irvine. He currently works with Irvine Residential Living, focusing on Homes for Sale in Irvine and Condos for Sale in Irvine.