1. Understanding the nature of your costs
There are a number of good books and courses on costing some of which may take years to complete. The intention here is not to turn you into a costing expert but to help you put a practical and useful budget together. If you need a more technical document or model, you would be well advised to contact a professional.
The
principles applicable to your business budget are the same as your
personal budget. Here it is perhaps easier as expenses are usually more
predictable and controllable. In categorising your costs, I suggest you
use the following:
1. Direct Costs
Costs directly associated with the income they produce - an example would be the cost of purchasing the food sold at a fast food outlet. Usually these will vary in direct proportion to your income - the more food you sell, the more food you have to buy in. These are traditionally referred to as "cost of sales".
2. Indirect Costs
Costs that cannot be directly attributable to the income of your business - the cost of consulting services may enhance your business and improve sales, however there is usually no direct link between a particular sale and the cost of the consulting.
3. Variable Costs
Costs that vary according to some determinable factor - the more you consume, the more it costs. Petrol would be a good example of this - the further you drive, the more you consume.
4. Fixed Costs
Fixed costs are relatively self explanatory, they may change in the long term but in the short to medium term they are fixed irrespective of levels of activity. Overhead costs such as salaries and rent are good examples of costs that are generally fixed.
As with the personal categories, you will find items that need more than one label. Costs will also not necessarily fit neatly into your categories. Some will be fixed for now but change every three months, or step up when certain boundaries are passed. An example of this is a water bill which has a fixed minimum and then costs you extra once you exceed certain usage levels. Technically this would be called a stepped fixed cost.
2. Planning ahead
Your financial plan is the one place where all the components of your business need to be pulled together. It is the culmination of all your specific plans - the result of your marketing, sales, growth, quality, and production plans.
Your approach to each area of your business (how you intend to market your product, how you intend to sell it and to whom) is likely to have a financial impact. This may be as simple as paying a commission on sales to a third party, or it may be an extensive set of sales and marketing channels that you intend establishing. Likewise, your production and quality plan will cost you money. The "how much and when" of each of these are turned into one common financial plan. The when is just as important as the how much.
As I mentioned earlier, a plan is really intelligent guesswork it is intended to help guide you and also provide you with a measuring stick to assess your performance. Here are some points to consider when putting your financial plan together:
3. Using your financial plan
The primary reason for producing a budget or financial plan, it for you to use. It is to help you manage your business and control your revenue and expenditure. Too many businesses only produce this plan when an outsider forces it on them - a banker or investor wants to see your financial plan before he will invest money in your business. This is not the time to run around trying to develop a plan, its the time to take your plan and modify it for external use.
Once you have put your plan together, you need to use it. A plan that occupies the top self of a storage cupboard gathering dust looses its value very quickly.
Use your plan to track your performance by comparing your actual spend and revenue to what you planned. This is a useful motivator and accountability tool as you review what you have done compared to what you said you would do. It is a discipline of constantly being aware of the financial implications of your business actions.
1. Direct Costs
Costs directly associated with the income they produce - an example would be the cost of purchasing the food sold at a fast food outlet. Usually these will vary in direct proportion to your income - the more food you sell, the more food you have to buy in. These are traditionally referred to as "cost of sales".
2. Indirect Costs
Costs that cannot be directly attributable to the income of your business - the cost of consulting services may enhance your business and improve sales, however there is usually no direct link between a particular sale and the cost of the consulting.
3. Variable Costs
Costs that vary according to some determinable factor - the more you consume, the more it costs. Petrol would be a good example of this - the further you drive, the more you consume.
4. Fixed Costs
Fixed costs are relatively self explanatory, they may change in the long term but in the short to medium term they are fixed irrespective of levels of activity. Overhead costs such as salaries and rent are good examples of costs that are generally fixed.
As with the personal categories, you will find items that need more than one label. Costs will also not necessarily fit neatly into your categories. Some will be fixed for now but change every three months, or step up when certain boundaries are passed. An example of this is a water bill which has a fixed minimum and then costs you extra once you exceed certain usage levels. Technically this would be called a stepped fixed cost.
2. Planning ahead
Your financial plan is the one place where all the components of your business need to be pulled together. It is the culmination of all your specific plans - the result of your marketing, sales, growth, quality, and production plans.
Your approach to each area of your business (how you intend to market your product, how you intend to sell it and to whom) is likely to have a financial impact. This may be as simple as paying a commission on sales to a third party, or it may be an extensive set of sales and marketing channels that you intend establishing. Likewise, your production and quality plan will cost you money. The "how much and when" of each of these are turned into one common financial plan. The when is just as important as the how much.
As I mentioned earlier, a plan is really intelligent guesswork it is intended to help guide you and also provide you with a measuring stick to assess your performance. Here are some points to consider when putting your financial plan together:
- Don't be a perfectionist - you will spend too long putting it together
- Use the categories to help you understand the nature of the cost behaviour
- Don't try and predict too far ahead - the world we live in changes too much too quickly to predict far into the future.
- The financial plan can only be as detailed as the other components of your strategic plan - it feeds of these.
- Reduce the detail as you move forward in time (0-6 months very detailed 7-12 months ahead detailed, 2-3 years broad assumptions)
- Plans change - don't be too rigid, your plans need to change as circumstances change.
- Keep it as simple as possible. People (including me) get caught up in producing elaborate and complex formula driven spreadsheets and loose sight of its purpose. Remember you will have to figure out how all those formula work next month or year when you try to update your plan.
3. Using your financial plan
The primary reason for producing a budget or financial plan, it for you to use. It is to help you manage your business and control your revenue and expenditure. Too many businesses only produce this plan when an outsider forces it on them - a banker or investor wants to see your financial plan before he will invest money in your business. This is not the time to run around trying to develop a plan, its the time to take your plan and modify it for external use.
Once you have put your plan together, you need to use it. A plan that occupies the top self of a storage cupboard gathering dust looses its value very quickly.
Use your plan to track your performance by comparing your actual spend and revenue to what you planned. This is a useful motivator and accountability tool as you review what you have done compared to what you said you would do. It is a discipline of constantly being aware of the financial implications of your business actions.
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