An estimate of revenue and expenditure Oxford English dictionary
In developing your business, it is vital that you know where you want to go and how you plan on getting there - your vision or purpose and strategic plan. This plan will include amongst other things, the financial implications of what you plan to do - what it will cost you and what income you anticipate it will generate. The estimating of these costs and income is your budget or financial plan.
Sitting down to develop a budget for your
proposed or existing business is about as daunting a task as writing
this article - where do I start? Like climbing a mountain:
1. Recording your costs
An excellent discipline to develop is that of recording your personal expenditure. This develops your awareness of what you spend money on and gives you the information you need to build your personal budget. It also tends to add a level of accountability and responsibility to your spending as you analyse where the money went. The cost of those clandestinely eaten chocolate bars each day can be a harsh reality!
I recommend the use of a small note book which can easily fit into your wallet or purse. This will enable to you to record the expense immediately without it ever becoming a big exercise.
The personal habit of recording expenses is easily carried over into the business environment where it is both legally and practically important to keep track of where the money has gone.
2. Reviewing your spending
Like an unopened gift, budgeting without review is useless. Turning your data into knowledge requires that you apply your mind to how you spent your money. It is this knowledge you need to plan for the future. Categorising your expenditure into the categories below will be useful in determining which of your expenditure is likely to be repeated and also which items you have a level of control over.
1. Fixed regular
Those costs which you cannot easily change and occur periodically. Examples of these would be house or car payments. In the long term, you can sell the house or car and therefore alter this cost, but without such radical action, this cost is there to stay. It is also a cost which is fairly predictable. Notwithstanding small fluctuations such as changes in interest rates, the cost is likely to be the same each period.
2. Once off
Costs that you do not anticipate repeating. An example of this would be the repair cost of your car incurred as a result of reversing into a pole - I would hope you do not anticipate repeating such an event!
3. Essential
The definition of essential is extremely relative to your value system and lifestyle. My wife and I shared one car for the first six years of our married lives, now we regard two cars as absolutely essential. As you progress through this exercise, you may find your definition of essential changing (depending on how big the gap is between income and expenditure).
4. Non essential
These are typically the luxuries or self indulgences. Things we recognise we do not need and would not impact our lives if we went without. For most people an overseas holiday, manicure, and private jet amongst other things, fall into this category.
You may find that some costs require more than one label such as essential once off expenditure that is fine, the idea is to understand the nature of your costs.
Review your spend regularly as doing this long afterwards is far less valuable in helping you change your spending behaviour (in other words, you can't return the eaten chocolates, but you can buy smaller ones next time).
3. Planning ahead
Intelligent guessing is the best way to describe what you will need to do. Using your new found knowledge of what you currently spend your money on, together with your plans for the near future, estimate your future expenditure. This tends to be an iterative process of guessing future costs and reviewing passed costs. I find it useful to involve someone intimate with your lifestyle, such as your spouse, to review this with you.
Do not expect to ever get it 100% right, life rarely happens the way we plan it. You will find though that with experience, you are able to cater for the unexpected in your budget.
4. Matching your income and expenditure
So far I have addressed the cost side of the equation, with income being conspicuous by its absence.
For those who are traditionally employed, this is the simple side - it falls into the fixed regular category where you get the same salary each month, and there is little you can do to change it without radical action.
Where your income is not fixed, you need to understand what drives your income - for a salesman, commission is earned on sales therefore more sales equals more income. Working out the anticipated sales will help the salesman work out his or her anticipated income.
Once you have a projection on income and expenditure, the fun starts! Rarely do the two equal each other with most of modern society attempting to live beyond their means. The pain of trying to stretch a limited income into a seemingly unlimited black hole of costs has caused significant amounts of distress, anguish and marital fisticuffs. There is no easy way to do this, nor a universal bandage which if applied will magically transform your budget. Below are some pointers you might find useful:
5. The role of saving
According to the Oxford English Dictionary, to save means to preserve for future use, or rescue, preserve from danger or misfortune. Both of these definitions are appropriate. The primary reason for saving is to keep your lifestyle within the boundaries of your income ... to spend less than you earn. To achieve this, you are required to adjust your mindset from our consumerist culture of 'shop till you drop' and reassess your values and spending patterns according to less than your income. Your borrowing potential, overdraft facilities and access bond become less critical.
Learning to save will preserve you from the danger and misfortunes of debt spending. It has the added bonus of a rainy day reserve - that item you forgot off your budget.
The amount you save will depend on your personal circumstances and discipline. The amount is however less important than the act of saving.
- its done one step at a time
- remember where you're going
- but focus on where you put your feet next
- persevere
1. Recording your costs
An excellent discipline to develop is that of recording your personal expenditure. This develops your awareness of what you spend money on and gives you the information you need to build your personal budget. It also tends to add a level of accountability and responsibility to your spending as you analyse where the money went. The cost of those clandestinely eaten chocolate bars each day can be a harsh reality!
I recommend the use of a small note book which can easily fit into your wallet or purse. This will enable to you to record the expense immediately without it ever becoming a big exercise.
The personal habit of recording expenses is easily carried over into the business environment where it is both legally and practically important to keep track of where the money has gone.
2. Reviewing your spending
An unopened gift is worthless Rick Warren
Like an unopened gift, budgeting without review is useless. Turning your data into knowledge requires that you apply your mind to how you spent your money. It is this knowledge you need to plan for the future. Categorising your expenditure into the categories below will be useful in determining which of your expenditure is likely to be repeated and also which items you have a level of control over.
1. Fixed regular
Those costs which you cannot easily change and occur periodically. Examples of these would be house or car payments. In the long term, you can sell the house or car and therefore alter this cost, but without such radical action, this cost is there to stay. It is also a cost which is fairly predictable. Notwithstanding small fluctuations such as changes in interest rates, the cost is likely to be the same each period.
2. Once off
Costs that you do not anticipate repeating. An example of this would be the repair cost of your car incurred as a result of reversing into a pole - I would hope you do not anticipate repeating such an event!
3. Essential
The definition of essential is extremely relative to your value system and lifestyle. My wife and I shared one car for the first six years of our married lives, now we regard two cars as absolutely essential. As you progress through this exercise, you may find your definition of essential changing (depending on how big the gap is between income and expenditure).
4. Non essential
These are typically the luxuries or self indulgences. Things we recognise we do not need and would not impact our lives if we went without. For most people an overseas holiday, manicure, and private jet amongst other things, fall into this category.
You may find that some costs require more than one label such as essential once off expenditure that is fine, the idea is to understand the nature of your costs.
Review your spend regularly as doing this long afterwards is far less valuable in helping you change your spending behaviour (in other words, you can't return the eaten chocolates, but you can buy smaller ones next time).
3. Planning ahead
Intelligent guessing is the best way to describe what you will need to do. Using your new found knowledge of what you currently spend your money on, together with your plans for the near future, estimate your future expenditure. This tends to be an iterative process of guessing future costs and reviewing passed costs. I find it useful to involve someone intimate with your lifestyle, such as your spouse, to review this with you.
Do not expect to ever get it 100% right, life rarely happens the way we plan it. You will find though that with experience, you are able to cater for the unexpected in your budget.
4. Matching your income and expenditure
So far I have addressed the cost side of the equation, with income being conspicuous by its absence.
For those who are traditionally employed, this is the simple side - it falls into the fixed regular category where you get the same salary each month, and there is little you can do to change it without radical action.
Where your income is not fixed, you need to understand what drives your income - for a salesman, commission is earned on sales therefore more sales equals more income. Working out the anticipated sales will help the salesman work out his or her anticipated income.
Once you have a projection on income and expenditure, the fun starts! Rarely do the two equal each other with most of modern society attempting to live beyond their means. The pain of trying to stretch a limited income into a seemingly unlimited black hole of costs has caused significant amounts of distress, anguish and marital fisticuffs. There is no easy way to do this, nor a universal bandage which if applied will magically transform your budget. Below are some pointers you might find useful:
- Don't attempt this when you are tired or don't have sufficient time
- Don't give up when you cannot get it right straight away
- Use the categories to work out what you can control or change - where you can cut costs and increase revenue
- Work out what is important to you and be prepared to make changes to your lifestyle
5. The role of saving
In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.
Proverbs 20:21
Proverbs 20:21
According to the Oxford English Dictionary, to save means to preserve for future use, or rescue, preserve from danger or misfortune. Both of these definitions are appropriate. The primary reason for saving is to keep your lifestyle within the boundaries of your income ... to spend less than you earn. To achieve this, you are required to adjust your mindset from our consumerist culture of 'shop till you drop' and reassess your values and spending patterns according to less than your income. Your borrowing potential, overdraft facilities and access bond become less critical.
Learning to save will preserve you from the danger and misfortunes of debt spending. It has the added bonus of a rainy day reserve - that item you forgot off your budget.
The amount you save will depend on your personal circumstances and discipline. The amount is however less important than the act of saving.
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