Some accountants compare a business’s budget to a roadmap or GPS directions. They use this analogy because your budget guides you towards your goals. If you don’t have a budget, your business probably won’t get to where you aspire it to be.
Now is the time to create your budget for 2016. The first step is to estimate your revenue for the coming year. The easiest way to do this is to take your sales from 2015 and incorporate price increases and trends you expect to encounter in 2016. The estimate you develop will be your target revenue for the year. It should be ambitious but also realistically achievable.
The next step is to project your operating costs. These can be pulled directly from your profit and loss statements (P&Ls). Costs are either fixed, variable or semi-variable. Fixed costs will remain the same whether sales rise or fall so they are the easiest to incorporate in your budget. Some examples of fixed costs are rent, depreciation, and insurance.
Variable costs are completely dependent on sales. Some examples are royalties, labor costs and manufacturing costs. You can calculate these costs as a percentage of prior year sales when creating your new annual budget.
Semi-variable costs are fixed to some degree, but also increase with sales. An example of this is overtime pay. Semi-variable costs are the hardest of all the expenses to project so it’s a good rule of thumb to always be conservative when estimating.
Once you subtract your projected operating expenses from your estimated sales, you’ll arrive at your projected profits for the year. With these estimates, you can plan for the coming year and make important decisions like whether you can purchase new equipment, move to a bigger location, add staff, or give your employees bonuses or raises.
A budget should be created at least every year. Most budgets are divided into 12 months and have blank columns next to your estimates that can be filled in with actual results as the year progresses. You may want to consult an accountant when preparing a budget or you can attempt it yourself using software or online resources (Microsoft offers a number of resources for creating a budget). Just remember that it's important to use realistic figures and make adjustments throughout the year.