June Feature-

Developing a Business Budget

By:  Keith T. Chiles, MBA

 We often hear that the reason businesses fail is a lack of funding. I don't agree with that. I feel one of the most significant reasons why a business fails because of a lack of budgeting. If we look at large businesses and corporations we find companies that operate with carefully developed budgets, they follow those budgets, and they track how close they come to meeting their goals and expectations from a budget standpoint.

   Small companies or owners of small businesses often make the mistake of letting the finances operate the way they do in their home life: if there is money in the checkbook things are fine, but that doesn't take into account the need for cash flow to cover the expenses that occur throughout the operation of a business.

   A far better way to operate the business is to keep accurate records of how all the businesses dealing and establish what percentage of sales is spent in each area, assuming it's a retail business or retail type business, and then using those percentages of variable expenses relative to sales to calculate a budget for each month.

   The purpose of this article is to introduce the basics of budgeting and not to provide an in-depth evaluation of financial management. We take you through the basic process of building an initial budget using a spreadsheet called Microsoft Excel, and introduce fundamentals of money management.

   We strongly recommend this work be done by a professional who has a thorough grasp of financial management. In this paper we will be using a spreadsheet that separates the areas of business income from the expenses. We will categorize various expenses and group them together so you'll have understanding of the variable expenses, fixed expenses, and the employee expenses. Will then subtract the expenses from the income to derive the net income for the business. We then show how to use Excel to create budget ratios so you can compare the percentage of expenditures across different income amounts.

  In this paper we discuss how you can either began your budgeting, or steps you can take to examine your existing expenditures and create a budget that allows you to forecast and know what your profitability will be as long as you can estimate sales. This assumes that the company is able to meet its sales expectations. It also requires that the astute manager is ready, willing, and able to adjust the budget quickly based upon expectations that are either too high or too low.

Why we fail to budget

   Most of us fail to budget in our lives because we like to feel in control of our money or we uncomfortable managing money. Some people fear the budget will take away their own financial control.  The checkbook is their main accounting system and if there is money in the checkbook, then the business must be healthy.

   This is a false sense of security as it does not take into account the need to accumulate or accrue money for future or annual bills. For example, business insurance is paid on an annual basis but it may be impossible to write a check on the date payment is due because the money was not set aside and accumulated for this expense.

   When budgeting effectively, money is set aside, or accrued, for annual payments so the money is sitting in the account. When using a business budget, a spreadsheet is used to keep track of the money in the account and the bill that is to be paid with it.

   The budget process begins with good accounting. Without good historical records of past performance it is almost impossible to develop an effective budget, because developing a budget from scratch requires the manager to simply guess that what the costs will be. In addition, it's not possible to accurately predict what sales might be in any given month without historical data.

   Developing a budget for a new company requires this guesswork, but that's expected a new company that has no accounting history. It may take several months for a new company's budget to show signs of accurate costs and sales. It takes up to three years of historical data to develop a good budget.

The steps in setting up a budget are:

• Get organized.

• Organize historical data.

• Create expense ratios.

• Transfer the information into a budget forecast.

• Monitor the forecast for accuracy.

Setting up a budget for an

existing company.

Get Organized
   As we have suggested, the place to begin is by reviewing the historical accounting data for the company. If the company is not using an accounting software system such as Quickbooks, it would be a good idea to consider looking into automating your accounting. If you do have a good accounting software package that will show past financial performance, we will begin by generating a few reports.

   I generate a monthly statement of profit and loss that shows the gross sales for the company along with the cost of goods sold (COGS). This would be the sales receipts less the amount paid for supplies or merchandise. This provides the gross profit margin and total sales figures.

Organize Historical Data
   Begin by using a spreadsheet like Excel to lay out each month of the year and create a first line in the spreadsheet for Sales. The next line should be the Cost of Goods Sold (COGS) and the third line will show the gross margin by subtracting the cost of goods sold from the total sales for the month. This provides us with the gross sales margin, but will not take into account the cost of rent, utilities, employees or other operating expenses.

   The next section of our simple spreadsheet will be for the general expenses incurred as a result of operating the business. Skip a couple of lines for neatness and visual organization and make a list on the Items column for the various expenses like automobile, utilities, telephone, insurance, loan payments, and any other expenses you incur other than employees.

   I try to keep the the fixed expenses like rent and loan payments lumped together while keeping the variable expenses like utilities, telephone, and marketing expenses together so they are easier to rearrange later.

   The third section will be for employee salaries. Salaries include both hourly and salaried employees. I generally keep any hourly employee salaries separate from those who are paid monthly. This allows me to make "what if" evaluations down the road if needed.

   Let each of the sections of the spreadsheet have its own little section along with a subtotal for that section. This will leave you with the original gross sales margin section, the fixed expenses section, the variable expenses section, the hourly employees section, and the salaried employees section.

   Carry down the gross margin to a section at the bottom of the spreadsheet so you know how much money you have coming into the business. Label this as "Total Income." Below the income line create another line and call it "Total Expenses." Now you should have the cells in the total expenses row add up the subtotals of the expense categories listed above so you will know what your total operating expenses are. Now create a "Net Profit" line that subtracts the total expenses from the total income lines to give you the net earnings for the company.  This is often referred to as EBIT, or Earnings Before Interest and Taxes.

  If you are a service or manufacturing company, the categories will be slightly different, but they will be laid out similarly.  It is still necessary to start with income and subtract expenses to arrive at earnings.

   I strongly suggest bringing in a professional to create your budget if you are having any problems or do not understand what is going on here.

Create Expense Ratios
  This simple spreadsheet should provide you with information about how much money your company is making or loosing each month. It is now time to set up some ratios so we can see how much we are paying for different items as a percentage of sales. I like to create a ratio section below the area we have already created. We will make another list of items down the left Items column and label them like the expense categories, but will add the word ratio to help keep ourselves organized.

  The problem with simply using the monthly amounts is that it is difficult to see what is going on with a particular expense as other things change.  For example, the cost of gasoline has gone down by a hundred dollars after working to save gasoline costs.  The temptation is to think your program is successful.  Using ratios lets you view your gasoline cost as a percentage of total sales for the month.  If sales are also down, then it might be expected that gasoline costs would have also gone down.  There may have been no savings as a result of conservation efforts.

Using ratios, however, allows us to look at gasoline as a percentage of sales.  If gasoline is normally three percent of sales and has dropped to two percent after initiating a conservation program, then we can assume the program is successful.  This assumes the price of gasoline had not changed.

List the expense ratio categories as instructed above by listing the expense and appending the word "ratio" after the category item.   The ratios simply the division of one category into another so if we spent $5000 on gasoline last month with a half-million dollars of income, we simply divide the $5000 gasoline expense by the $500,000 income for the month. This is done in a spreadsheet by dividing the contents of one cell into the contents of another.

  This leave us with a number that is less than 1, but don't worry as we will convert this to a percentage by using Excel. Pick categories such as hourly salaries and create the ratio in the cell next to the category. This is done by clicking on the cell with the ratio and right clicking to bring up the menu that allows you to select a formatting option.  Select a number and percent options and the contents of the cell will be multiplied by 100 and the percent sign will appear after the number.

   You can create a ratio from any expense item to see what the expenses are as a ratio or percentage of sales. Give some thought as to which expense you want to look at as a percentage of sales. Look at the numbers a little bit because this is a snapshot of how your business is running from a financial standpoint. Think about these numbers and ask yourself if this is what the numbers should be. Be aware that it is not uncommon for a business owner to look at the expense ratios and see that time and energy has been spent focusing on some costs that were a very small part of the business.

   I want to point out that this form of expense ratio analysis are not the same as doing financial ratio analysis.  Financial ratios, such as the acid test ratio, is used for evaluating other aspects of the business and may be the subject of a future article.

   Take the spreadsheet and copy it to a new one so you can play around with some of your costs and not loose all of your previous work. With a fresh copy of the spreadsheet, you can copy the good column and create a spreadsheet for an entire year. You can now use this basic templates by adding the additional data to these new columns and see some of the trends over the year. 

    You may also adjust some of the actual expenses to give you a baseline and for establishing your budget based upon sales. For example, if salaries represent 12 percent of your sales then you know how much money to budget for next month if you can predict what your sales will be. Forecasting sales will be much easier when you have historical data in the spreadsheet. 

Trend Analysis
   Trend analysis can be important to the operation of the business. Trend analysis is simply looking at historical data in attempting to forecast what next month, the next three months, or the next year will be from a budgeting standpoint.

   Excel can provide graphs that show you the trends and you can explore a lot with those graphs, but creating graphs is beyond the scope of this paper. The most important thing to do at this point is to look over the last three years to see sales are rising or dropping.

   Do not be tempted to look at the annual trend by just looking at one year. It is necessary to look at individual months over a period of at least three years in order to spot trends in individual months. Keep in mind monthly revenue and expense numbers may fluctuate throughout the year.  If it is January and you're trying to predict sales for February, it is important to look at February for the last three or five years to see how sales have been during that month.

   If sales from for February over the last three to five years have steadily climbed then you have the ability to predict the next February's sales, because you can see how much it has climbed over three years. Consider any market changes before predicting the February sales trend.  If the last few years show that January was climbing and the most recent January showed a decline, then you can probably expect that February will also show a similar decline.  Do this for each month and calculate the percentage of increase for each month over a period of three to five years.

   Consider the possibility that some months will rise in one year and may fall in other years.  You should see a pattern developing for months that may have bad months in good years that otherwise had a steady increase in sales. Armed with this knowledge you should be able to predict any particular month for sales.

    If you can predict sales, and sales is the number that drives your expense ratios, it's a simple matter of forecasting your sales and letting the ratios tell you how much money to allocate for each expense category. This is done by taking the second copy of the budget spreadsheet and building a new budget for each expense category by looking at the expense's percentage of sales .

   If you're lost this point, don't be surprised and don't be discouraged. It is normal to be a little lost. What we are doing is to use historical data to figure out how much money you've spent in each expense category as a ratio or percentage that can be used to calculate how much money to spend in your budget for that item. For example; suppose that salaried employees have consistently cost you 20 to 25 percent of sales.

   Knowing that employee salaries should be 25 percent of sales, we merely take that data to the budget forecast spreadsheet and allocate 20 to 25 of your sales forecast in sales toward employee salaries. In other words were taking measurements of past expenses and using them to make predictions for the amount we should allocate for the month we are trying to forecast.  We do this with all of our variable expense categories to determine how much we should allocate each month for these expenses.

   Using the trend analysis of sales over the last few years, we should be able to predict an entire year of sales and expenses with relative accuracy.

   One of the most important aspects of budgeting is to understand why trends have changed. For example in a seasonal business of lawn mowing, we know that each year during the winter months, business will go down and sales will drop off. We also known that sales and work will climb as the weather improves.  We know that sales are seasonal and we can reasonably predict the seasons.

   What becomes more problematic is when the sales trends fluctuate from one year to the next. For example, let's assume our gardening business did $300,000 in sales last year, 200,000 the year before, and 300,000 year before that. In other words business is rising, falling, and rising again. If sales is fluctuating, it is important to know why.

   In big companies are countless footnotes on accounting documents explain the various trends they see. For example: accounting documents in a large company may explain the loss of sales following the Sept. 11th attack on the United States. Most small businesses don't do this kind of record keeping, but they should. I recommend to my clients who do their own accounting that they look at the trends, create a paragraph that explains why they think this trend has occurred, when they feel the trend will turn around, and what they are going to do to offset the loss of business.

Cash Flow
   Cash flow is a serious problem for small businesses. Cash flow problems occur when there's not enough money to cover the bills and it becomes necessary to borrow. I've seen companies that are doing very well and are quite healthy, but they have a cash-flow problem because they have not developed controls on cash or payment collection.

   For example: Consider a company selling services, such as our gardening company, with most sales occurring between April and October. If that company bills its customers on a monthly billing cycle, it will have to pay its employees to mow lawns and clean yards during the month of April as business begins to pick up. If the customers get 30 days behind in making their payments, the business will be in the position of having to pay salaries for work, but will not receive their money for 30 days.

   This situation requires the business owner to keep enough money in an account to cover the outflow of cash to pay employees before the money comes in from customers. If we do business with customers who fail to pay for 90 days, the company is extending 90 days of credit to its customers and will have to pay as much as a fourth of a year of salaries before any income is received from the work that was done.

   Another example a cash-flow problem is a retail company that must purchase goods for seasonal sales. If you run a garden department, it may be necessary to purchase plants and related goods to begin selling in the spring.  The goods must be available for customers as the demand rises. Although most vendors will give the seller 30 days of trade credit, it may be necessary for the retail store to pay the invoice on merchandise for as many as three months before many of the items are sold. If external and influences cause a reduction in sales for the season, the items may remain on the shelf long enough that the bills are paid long before any income is seen. 

   Both examples create a situation where the company becomes cash poor. They must pay bills from before revenue is received and money must be available for this. One component of this issue not generally understood by businesspeople is that the opposite situation occurs at the end of the selling season. At the end of the season, employee expense and the cost of goods sold may drop and the revenue will continue coming in as customers pay their bills for services already rendered. It is important that this money be placed into investments and be available for the next cyclic trend.

   Using our gardening services business as an example, we know the work and salaries will increase in the spring as demand for services rises at the beginning of the growing season. We also know we may not seen any income from the sale of services until around June. At the end of the season we are going to see a reduction in service requests as the weather cools and the rainy season hits.

   Even with a reduction in business in October or November, we know that most customers will catch up on paying their bills and make payments during the early winter months. Many business owners make the mistake of spending the extra money by perhaps buying a new car for themselves with what they perceive to be a bonus.

   Good business owners will take that money and invest it in a secure investment knowing they're going to need it in April or May to pay salaries. What this means is that the cash will for this business will lag by two or three months regardless of the time of year, so it's necessary to set the extra money aside as the cash flow catches up.

   If the business manager fails to set aside enough cash for next season, it will be necessary to use a credit line to meet expenses while waiting for revenues to catch up.  This is can be a necessary evil in business and should not bother the business owner to allow some debt to rise while waiting for revenues to catch up with expenses. I prefer to budget in advance instead of using credit lines.

   The growing seasonal business represents another cash-flow problem to the business owner.  Suppose our gardening business grows by 50 percent each year. If the business grows, then the excess cash we set aside in October and November will not be enough to handle the much larger salaries of an expanding company in the spring. This means that it will be necessary to borrow money to pay salaries until revenue catches up with expenses.

   Cash flow problems can be solved by another method. Keeping a close watch on the time lag between sales and revenue collection allow many business owners to manage the cash flow proactively. For example, many businesses offer a small discount for the prompt payment of bills. Another tactic that can be used if you have a few large customers is to negotiate with them to pay their bills sooner.

     Basic financial management is to bill quickly and pay slowly. Although the simple statement is the fundamental premise of financial management, and many companies practice this to the letter, it is not always an effective strategy.

   I have worked for companies who waited 90 days to pay their bills even though they had agreed to pay at 30 days. That same company had difficulty understanding why many of its vendors were threatening to cut them off. That same company expected its customers to pay within 10 days. That company had a quarter of a year of their supplier's money to invest and generate income.

   By collecting quickly and paying slowly,  company was able to maximize profits from its cash flow, however, that company had difficulty getting discounts or credit from its vendors when needed. Their  credit rating was so poor that other businesses raised their prices to compensate for the slow payment.  As a result, the company only did business with some of the worst sellers and they generally paid a premium price for products. That company paid more for its aggressive cash-flow management than it ever made by investing the cash .

   At the opposite end of the spectrum is a company that paid its bills promptly. This company made very little money by investing its excess cash, however, it had such a good reputation with its vendors that they had no problem getting credit or discounts whenever necessary.

The point of these illustrations is that we work in cooperative interdependencies between ourselves, our customers, and our vendors.  Ethical financial management can make many other areas of the business run much more smoothly.

Working with Banks
   Banks can be difficult to work with because they generally don't want to lend money to companies that need to borrow. They only want to lend money to companies that are doing well in may not needed to borrow.

   One of the most fundamental mistakes the business owner can make is to get into financial difficulties and then go to the bank for help. Recognize that every business will eventually need a business loan. With this in mind, it is always best to get to know the banker before the money is needed.

   Bankers are people and there's nothing to prevent a business owner from taking a bank branch manager to lunch and getting to know that person. Make friends with your bank manager, because the bank manager may be able to push a loan through when it is needed later. Whatever you do, don't be a walk-in customer asking for a business loan. Develop a good relationship with your bank manager and you should have very few problems securing a loan when needed.

   Most banks like to lend money to successful companies that are expanding. Loan officers look at two characteristics of your company: assets and cash flow. I find that bank managers are receptive to businesses that use the Small Business Administration's standard business plan.

   If you are trying to expand the business, you have a well-written plan, and a well developed strategy, obtaining expansion capital should not be difficult. Unfortunately, most companies need money to fund their operations. The typical scenario is that the business owner has gotten behind in some bills, perhaps funded their business with some credit cards, or even taken a small home equity loan our own their home. The failure of the small business owner to properly plan and strategize their operations is the problem behind the financial problems.

   This becomes very clear when loan applications are being made to borrow money to consolidate loans to pay operating expenses. It is another fundamental tenant of financial management that money should only be borrowed for capital expansion or predictable business cycles. Money should not be borrowed to fund operational expenses as this is an indicator of a flawed business strategy. Don't confuse the borrowing of money to fund operations with a line of credit that is supposed to be used for that purpose.

   Getting to know your banker will help the two of you become acquainted as businesspeople. It is also an opportunity for the banker to become comfortable with the thought of doing business with you. My recommendations to get to know a couple bankers, meet with them, and decide which ones you be comfortable in working with. Develop a professional relationship with that banker and move your business to the bank.

   Don't be shy about asking the banker what kind of services are provided by the bank to help make your business more efficient. Most business owners will be amazed to learn how much the bank can do to help them, but most small-business owners don't want to pay the fees associated with those types of assistance.

   If the banker recommends that you purchase a service from them, such as a lockbox service, then asked the banker to evaluate your business and show how the lockbox service will pay for itself. Let the bank manager analyze your situation and determine whether or not you are a candidate for such a service. I use this only as an example of a business service, but there are many things the banker can do for you. The most important one is for the banker to know you and to know your business before you need money.

   This suggests that getting money is much much easier when you have established relationship with the bank and a well-managed business. The difficult time to get money is when operating expenses have gone out of control, because bankers are educated and knowledgeable enough to know the signs of fundamental business problems.

   It is my recommendations that most businesses work with a consultant to develop good business plans and to develop good cash-flow management methods. Good cash-flow management will help keep you out of the banks, away of loan need to borrow money for operations, and will help keep you focused on growth and expansion.

Variants
   By this time we have established your financial history and created a financial forecast. Each step in the process is to track expenses on a month-to-month basis so we can calculate the variance.

   This can seem a little complex, but if you know the budget forecast, and then you have real numbers, you can simply subtract the real numbers from the forecast to arrive at the variance. The variance is how much you missed your budget. I do not present specific guidelines on how to set up a variance in a spreadsheet, but the important thing is to carefully track the numbers every month and know how much your operations have missed your budget forecast. 

    Don't worry if there is a large variance in the first months, because this is normal and no budget is perfect; especially for the small business. Small businesses are subject to a lot of financial fluctuation, because the numbers are usually too small to be precise. Large companies can accurately predict the sales to less than a percent and the same goes for expenses. The main thing is to know you varied from your budget and to know why.

   Look at the trends in the variance over the next few months.  If employee salaries, for example, are 25 percent of sales and in your initial budget calculation, but employee salaries is actually coming in at closer to 35 percent, it's necessary to figure out why. The thing to consider is whether or not your historical budget is accurate. We created a budget based upon history, is that history accurate? It is not uncommon to look at historical numbers and find that budgets were done so inefficiently that they are no longer useful for predicting the next year.

Analysis
   Next ask yourself if all the expenses and salaries for were handled efficiently. You may find that they were not. I have seen companies with salaries that were more than a should have been, because the company was not managed efficiently. This was not recognized until we started budgeting. This is common and many expenses need to be examined to determine if that expense is reasonable.

   Examine each expense category and ask yourself if this expense is correct and reasonable. We ask yourself how each expense can be reduced. I worked with one company where service technicians worked in the field as two-person teams.

   They were based in Stockton but much of the work was in San Jose. Overtime expense was not realistic because they were paying employees to drive to the job site. This did not become obvious until we started budgeting and were looking at the numbers.  We reorganized the business into work and hired people in each cell to keep a vehicle at their home to be dispatched. This is an example of how budgeting and brainstorming can be used to control costs. The result was a 30 percent reduction employee costs and about a 20 percent reduction in vehicle operating costs.

   Do go overboard with cost savings and keep some inefficiencies built into your budget because people get people sick, people have bad days, vehicles can break down, and the power can go out. All these add up to problems that can occur in business.

Cash flow and Annualized Expenses
   One area that bothers a lot of small-business people in it is when it comes to paying annual expenses. For example, suppose the business insurance premium of $5,000 must be paid in December and it causes a cash-flow problem for the company. 

   If we look at the budget forecast, there should be a line item for business insurance with $5,000 in December. If we are creating this budget in March, we simply calculate the number of months between now and December, and divide the $5,000 expense by the number of months before the payment is do.  This provides us with the monthly cost of insurance for the remainder of the year.

   Place this money into the budget as accrued insurance expense and write a check for that amount every month to a separate savings account. The separate account is to prevent the small-business owner from accidentally spending that money before December.  Setting up a small savings account and moving money into that account to pay annualized expenses can be an effective strategy.

   Make another spreadsheet that includes the money that has been accrued and what bills are to be paid with it.  At the end of the budget year when you paid the insurance bill, or are doing next year's budget, adjust the accrual rate to be the amount of the insurance payment divided by 12. This will correct the accrual rate for an entire year of accrual.

   Repeat this process for every expense you incur on an annual basis so money will be available when the bills arrive. This will reduce the amount interest paid to borrow money for operating expenses.

Capital Expenditures
   Capital expenditures are items like vehicles, display shelves or cases, computers, cash registers, and major tools. These are items that are rarely replaced in the normal course of doing business.

   Look around that these kinds of items and determine which ones will need to be replaced and when.  An example might be that a machine shop may have a very lathe that costs $15,000, but the lathe is either getting old or there is a need for another one to increase production.  We determine there will be a need to purchase another one in the next few years.

   This would be an excellent candidate for a business loan as the useful life of a  lathe may be over 15 years, and money can be borrowed for five years. It might be justified in purchasing an additional lathe on credit, because the lathe will generate additional income and pay for itself.

   Another way to look at it would be to make the decision to make the purchase in three years and to set aside about $500 each month in the accrual account.  This will make the money available for this capital expenditure when you need to purchase the lathe three years. This kind of proactive cash management allows the company to avoid having to go to the bank to borrow money for equipment.

   Treat the accrual for this kind of capital equipment the same way you treat the accrual of money for paying the business insurance.  Set the money aside and record it in a spreadsheet so you will know how much money in the fund is allocated toward insurance and how much of its allocated toward different pieces of equipment.

Financial and Earnings
   One of the goals of financial management is to have the company's money working to make money for the company. The means to the good manager of the will carefully control costs during good business cycles and invest cash instead of spending on frivolous items or paying big bonuses to themselves.  This will eventually become a significant source of income for the company known as earnings from investment activities. For the small-business person, setting aside money every month and investing it could generate enough income to carry the company through slow times.

   Another option for an investment of additional cash would be to purchase other businesses. There are two basic types of business acquisitions: acquisitions to purchase competitors and acquisitions to enter new markets.

   If a bank purchases another bank in their own market area, they are purchasing a competitor in order to obtain additional market share.  This may be done for many reasons, but the outcome is that the two banks can operate as one bank more efficiently than as competitors.

   If a bank in northern part of a state purchases a bank in the southern part of the state, they are making an acquisition to enter new markets.  They are purchasing an existing business in a new area and it avoids the need to expand into the area and then compete with the other bank.

   It is occasionally possible for the small business to either purchase a competitor who is going out of business, or to purchase a competitor who serves an area you would like to expand into. Either of these opportunities are ways to invest surplus cash if the market appears to be improving.

Budgeting for a New Company
   Budgeting for new company is similar to budgeting for an existing company except that you must make up or guess at the numbers. Estimate any potential seasonal trends you will encounter and estimate your sales forecast based upon these trends. Try to speak with owners of similar businesses in another area to get an idea of what these numbers might be.

   Don't be overly optimistic as it can take quite a long time for a company to develop the kind of growth that the owner might want.  An example might be that you can estimate the expenses of employees and equipment in the yard care business.  You know you're going to need to acquire certain amount of capital equipment, hire a sales representative, hire three or four employees to do the work, and perhaps a truck or trailer to move the equipment around. These expenses can all be estimated. What is much more difficult to estimate sales.

   My recommendation is that people should be a pessimistic when developing a sales forecast for new business and the budget must be watched much more closely than with a well-established business. Go through the same steps in developing your budget based on estimates and you will have a good picture of what your business will look like. Ask yourself if these numbers are realistic. Don't play Superman. Don't think that you can work sixteen-hour days, seven days a week, for several years. Most business owners who claim to work those very long hours actually take more time off than they realize.

   Build your spreadsheet with estimated data, create the ratios, and then develop your budget estimates using those ratios. Develop the spreadsheet with the variance reports so that you can know how accurate you're estimates are as the real data comes in. Adjust your ratios quickly as actual sales and expense data begins to roll in and monitor the profitability very carefully.

   Again, ask yourself are realistic your sales forecast is. If the numbers look acceptable to you that it's time to open the business, but watch those expenses and sales forecasts. Instead of being a budget, your forecast is a plan.  Constantly monitor to see how close your actual numbers are to your plan.

Summary
   I recommend the business owner pick up some good books on budgeting and financial management for the small business. This paper has only been a primer to get you started and to get you thinking about budgeting.

   Following a budget can significantly help in the management of your business because the budget forces you to look at your cash and finances and management. Don't chase expensive solutions to problems. I've seen many companies operate on the old envelope system of keeping cash available for various expenses and then replacing the receipts with cash at the end of the month.  People using this method don't have to worry about exceeding their budget when the credit card bills arrive.

   This is a particularly effective method of handling situations where the business owner or employees will take clients or customers out to launch. It's also very good for handling gasoline purchases, because it keeps people from falling into what I called the bottomless wallet syndrome, which is so common when using credit cards. I'm amazed by how quickly a few small purchases can add up when using a credit card.

   Develop your budget, follow it, monitor it, and think about it. This will make your business operate much more smoothly and more profitably.

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