Sunday, June 17, 2012

Online Accounting and Budgeting Basics

All businesses need a budget, but small business owners often struggle to construct an operating budget, especially when their company is very young and just starting to grow. A budget lets you compare the data from accounting software to actual performance and figure out what changes you need to make to actually direct and plan for your business. Creating a budget easy enough that there's no excuse to put it off one more day. You will use the information from your online accounting software such as a profit and loss statement as the foundation of the budget, along with industry standard information.

The first thing to do is find your data. You have to use real numbers to help guide your work as you make a budget for your business, whether they come exclusively from your own accounting books or also include industry standards from other businesses in your market. The more information you have about your own business, meaning the longer you've been keeping good records and the longer your business has remained essentially the same, the less important it is to collect a lot of data about competitors. But you should always try and do some research by speaking with suppliers, customers, and competitors if you can, as well as looking for information published by small business organizations in your area.

Most people make their budgets using a spreadsheet program. This is especially helpful when you use online accounting software because you can import and export numbers back and forth. Your budget should include a full calendar year at a minimum, and include sufficient categories for income and expenses to help you make decisions when you refer back to it. It's probably useful to include a date column and break down expenses into things like utilities, material inputs, marketing, membership fees, travel, taxes, and wages.

The most important numbers are projected income and income after taxes. This is more useful than revenue because you'll be making expenditure decisions based on how much money you expect to see coming in. Of course, you can't sell a product without buying materials, so your budgeting choices might impact income, but in the long-term your spending is limited by income, not the other way around. You should start by projecting your income based on any sales trends data you have. Be a bit conservative and record an estimated monthly income in your budget. If your income fluctuates, you might want to use one months' income for the following month's expenses. This ensures that you'll smooth out your spending and won't be left without enough to cover costs in the lean months. Figure out how much you'll owe for taxes each quarter, and subtract one-third of that from each month's income to give you a sense of how much cash you'll have to work with.

Next, look at you current expenses and record the costs you can't avoid. Later you might look at how to reduce those to free up more room for other things, but to start with you think of those as fixed. Material costs, rent for a storefront or shipping for an online store, and basic utilities are examples of costs you cannot eliminate. Then you can use this information to figure out how much cash you'll have free for other things like marketing, hiring a bookkeeper, or upgrading your capital. Don't forget to set aside some buffer cash in case surprise expenses come up.

As long as you rework your budget regularly to be sure you're not getting lazy about any costs that are too high, and assuming you actually follow your budget, the time it takes to put one together will give you a great deal more confidence and control when making business decisions. And you won't have to be surprised by the black numbers in your online accounting software ever again.

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