After collecting all the fixed and variable costs, business owners should begin creating the real annual business budget. This will also allow them to project a profit forecast with much better accuracy, wither based on profit or on sales. We may need to include return on our investment, if our year-end profit is too low. The investment could include the amount of money we put into our business when we first started it. We may also need to include “retained earnings” or the amount of previous year’s profit that we left in our business. With these financial elements, we should be able to set a proper profit goal. Once again, the goal should include return on our investment to ensure better cashflow.
Our budget is essentially an indication whether can achieve our profit target. In this case, we should be able to project our variable and fixed expenses. From variable expenses, fixed expenses and profit, we should be able to determine total income. We need to review collected data and without an accurate information, we can only guess. We also need to review our record-keeping system and this will allow us to get additional budgeting information. However, we may need to break down the variable and fixed expenses, because our record keeping system may not clearly define the differences. There could also be some seasonal fluctuations of our expenses and revenue.
In this case, we should have the proper ability to perform reliable analysis. The income contribution can be defined by determining the difference of values between variable expenses and sales. In this case, the variable expenses to produce these sales will increase depending on the sales volume. We should have a workable budget by determining the difference between desired profit and fixed expenses. With a developed budget, we should be able to get a tool for control. We need to start establishing the control tool when we have completed our 12-month budget.
Budget should be broken down into fiscal quarters and we will be able to check for any kind of discrepancy. When we have added enough items, it should be quite easy for some errors to infiltrate the total value. It means that the quarterly division of our budget will make it easier for us to manage our expenses. We will be able to understand income and expense variations. As an example, we can define the next quarter’s budget to anticipate peak periods of sales volume and stock. For slower periods, we should be able to offer special promotions, to boost sales. We should run through the whole process for a few times, so we will be able to pinpoint any kind of problem.
Proper business budget should allow us to work on any problem that may occur during the current quarter or month. Our objective is to allow budget to guide our activities so we will be able to ensure the most profitable form of business operations. Budgeting is a regular habit for any successful business.
