Every small business owner needs to periodically run a budget analysis to determine how much money they will need to continue operations and where they can cut back. But a budget analysis can be very complex; it governs all the expenses and income of a business. Here are some of the most common problems company owners run into.
Remember to Use a Large Enough Sample Size
You can't base a budget analysis on the expenses that you had in the lats month or even three months. There are certain expenses that need to be paid annually and you need to average out any seasonal or periodic changes. Ideally, you should look at the last year of your income and expenses in order to project out a budget.
Don't Try to Get through By the Skin of Your Teeth
If you spent $20,000 on equipment in 2016, that doesn't mean you should budget for $20,000 worth of equipment in 2017. That means you should be budgeting for at least $22,500 -- but, to be safe, closer to $25,000. You should always leave yourself a buffer on expenses that you simply can't cut back on. It may be possible for you to reduce your labor hours (at least, in some industries), but it's not possible to operate without insurance.
Always Consider Additional Variables and Risk Factors
Just because you made $200,000 in 2016 doesn't necessarily mean you'll make $200,000 in 2017. You need to consider whether there were any significant changes that you made in your business. As an example, 2016 may have brought with it more profits because you marketed aggressively in your local area. But what if your local area is now saturated and there's no more room for customer acquisition? If you don't retain 100% of those new customers, you may see your profits actually go down.
Account for Inflation and Increased Prices
Your budget shouldn't be based on the old prices for things -- it should be based on the adjusted prices for things. When you budget out your utility bills, for instance, you should be using the new electricity and water rates and the old amounts of usage. When you budget out for insurance, you should be calling your insurance providers for new quotes, rather than relying upon the old ones. If you rely too much on your prior year's income and expense sheet, you'll often find yourself falling short.
Budget analysis is only one area of bookkeeping, but it's complex and important. If you're worried that your budget analysis may not be accurate, you may want to consult with professional bookkeeper, such as Heller David. They can review your company's costs and give you a projection for the coming year.