Do you get that sinking feeling at the end of the financial year when you have to prepare a budget for the coming year? The pressure can be intense if you are neither an accountant nor do you have one to help with the basics.
I felt like that when I had to do my first budget many years ago. It took me days to get the basics done and I am sure that budget was a flop. To avoid going through that frustration again, I put together a recipe for myself and called it “budgeting for dummies.” It is based on the simple financial mistakes I made –it is not complicated– but it works and is designed for beginners.
Most budgets consist out of six components, which influences the outcome of the budget. The components are:
- Cost of Sales
- Gross profit rand value and percentage
- Net Profit
You need to have to look at each component separately and the method to determine how each will differ from business to business, depending on whether it is a service-based business or retail business.
Sales is usually the most difficult component for many. The secret to effective budgeting depends on how accurate you can predict the sales (income), which is where it gets tricky. Even though historical sales can be used, there is more to it. If you do it methodically you should get a fairly accurate picture.
Here are five tips to become a master at determining your sales for the month:
- You might have to determine how many days you have in each month to do sales (if you work on average sales per day, like in retail, you will have lesser sales in the shorter months).
- Know your profit margins on all your products, especially if you have more than one product with different margins.
In service orientated businesses, it might be easier as you might have fixed prices with fixed margins.
Accommodate the margin (percentage), so that it gets calculated automatically as you insert sales.
- Existing and consistent business is easiest to put into your sales budget, so start there.
Insert clients or customers that you currently have that have one recurring invoice per month per client/customer.
Categorize and group them according to the type of product that you invoice for. For example: you might have five clients that you invoice R2,500 per month, and 10 that invoice R1,000 per month. Therefore, R22,500 will be inserted into your budget for each of the 12 months.
- Do the same for quarterly, bi-yearly, and yearly clients and only insert those sales in the months they get invoiced.
- Next, look at random sales.
From the previous financial year, average random sales out and use that as a guideline. For example: if you had R12 000 random sales in that year, the average per month is R1 000.
If clients renew subscriptions for something every year, in a specific month, which is a once-off fee, just add it in the month that it occurs.
Now you have a “conservative” sales budget with only the current confirmed sales. The next step would be to work on your new business. If you use the same method per product/service, you should have no difficulty to “plan” your growth and new business generation.
You won’t know what your bottom line (profits) will be at this stage, only what your Gross Profit is. Consider saving this basic sales budget separately before you continue, as it will not change as you carry on with your budget and it is the cement of the budget. This is the bare minimum that you need to achieve.
Do your expenses budget next to determine where you stand as you will have your fixed sales sorted and your fixed expenses will give you a clear indication of where you are with your profits and you can either cut expenses to achieve your goal or look at ways to increase your sales further.
The tip that I give my clients when it comes to budgeting; have three budgets:
- Your dream budget
- What you would like to achieve
- The bare minimum that you have to achieve
This decides which one you are happy to go with.