From the blank looks of many out there – no I don’t have a
spy-cam, I’ve just seen too many blank faces over the years to know they are
out there – that’s a question I should be asking your accountant.
Unfortunately, your accountant is not running your business – you are.
For those that were able to answer that question – congratulations.
For those that couldn’t, don’t be too concerned. You’re
probably in the majority. And that’s not necessarily a good place to be. In NSW
last year nearly 90,000 small businesses shut shop, never to open their doors
again. Yes, for many it was a choice for such reasons as retirement, moving,
family, illness and death.
Far too many of that 90,000 simply ran out of money. They
went broke. Either as a start-up that didn’t have enough establishment income
to make it or as an existing business that didn’t have the right amount of cash
flow (in and out) to keep their business operating. Or a combination of both.
Another reason is that while the business may have survived
as a business, it simply didn’t provide the personal income to the business
owner and their family required to survive, let-alone live. They were personally
being sent broke – financially, emotionally, in relationships, physically and
health wise – by their business.
How can you reduce the risk of this happening to you?
Shock, horror, faint! Budgets!
Yes, budgets.
Why?
Budgets tell
you:
·
How much you need to take home each year
(personal budget);
·
How much you require to establish or expand your
business until such times as your business can run itself (establishment or
set-up budget);
·
How much you require to keep your doors open
(operating budget) and (importantly)
·
When and how your sales will occur and the
prices you need charge for your products and services (sales budgets).
Personal Budgets
How much do you need to be payed each year from your
business to survive and to live a comfortable life? These are two different
budgets. Your survival budget is the bare minimum your business needs to give
you – no frills, no holidays. Your living budget includes all those extras that
make your life enjoyable.
If you were working for an employer you would demand a
minimum income to work for them. You should treat yourself as an employee of
your own business – even if you are a sole trader and not a company.
I know some accountants will argue against this, but I
believe that even as a sole trader (where the total net profit of the business
is considered as personal income for tax purposes), the income you need to
generate should be included as a fixed expense to the business when it comes to
budgets – just like any other wages you have to pay. After all, how can you
accurately forecast the sales income needed to cover your personal expenses if
you don’t? Or are you going to just hope that you make enough profit?
If your business does not pay you a wage than how will you
personally survive?
It is so simple to do. If you can use Excel or a pen and
paper, than you can do a personal budget.
On a page with the 12 months listed in columns, list
everywhere where and by how much you spend your money month by month. List your
spending in the month you spend it, not annotate spending across a twelve month
period. For instance, if the $600 car rego is due in June, put the full $600 as
a payment in June, not as $50 per month over the full 12 months.
This way you can determine which are the heavy payment
months for you. Chances are though is that your business income may not
necessarily match when you need the money personally. So, with a budget you can
prepare for this and maybe, as a suggestion, have the money set aside just for
that purpose.
By-the-way, list everything you spend your money on
personally. After all, this is your budget, nobody else’s. If going to the
local club and investing $50 a Saturday night is an important part of your
life, add it in. Don’t forget birthday (and anniversary) presents etc.
Start here and then look at set-up costs.
Set-up or Establishment costs.
This is a really easy one (not necessarily simple). List everything you need to spend
money on just to get your business open and to the point where it is self
sustaining. Fit-out, licences, insurances, equipment, advertising, wages –
the list goes on-and-on.
And here is the really important – probably THE most
important – inclusion. How much will you need to have set-aside to cover your
personal costs and the running costs of the business until such a time as your
business reaches break-even point or can sustain itself. This is part of your
set-up costs, not just your fixed expenses costs.
Just because you register a business name and open your
doors for business does not mean you will earn enough to cover all costs. There
will be a delay between when you open your business and it is totally grown up
and looking after itself. Until then the money to pay for the running of the
business needs to come from somewhere. Now, where that is depends on you and
your resources.
Expanding a business. Than the process is no different. An
expansion is almost like a new business. There may be added expenses to start,
followed by a period of delay before the return on your investment is reached.
That’s why this budget is important.
Fixed Expenses or Running Budget
This is the last budget for this post (we’ll look at the
sales budget separately). This is simple. It’s the same as your personal
budget, just for the business not you.
List all expenses, month-by-month for the whole year.
Include everything.
Like your personal budget, your business running budget
outgoings will not necessarily match-up with the sales income on a monthly
basis. But at least you’ll be able to plan for that now.
More soon.
All success
Colin
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