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Business budget made easy

on Sat, 08/10/2013 - 20:56
"Entrepreneurship and Small Business" series, #7 (#6 The advantage of a business account; #5 How to pay yourself effectively; #4 How to manage your business; #3 Things to consider when you start your business; #2 What you should do before you quit your full time; #1 What needs to be prepared before you start your business; #8 Last minute tax saving for corporations; #9 The federal disaster to small businesses and working class
 
Lots of business owners asked me: how do we manage our business finances?? How do we come up with a calculation of how much we spend on marketing (that's the hardest part); hard cost and stuff??
 
My suggestion to all business owners is: try to separate your personal finance from your business. IT IS VERY HARD, especially when you first started. However, you have to understand, you definitely do not want your business drag your family down should your business fail (not that we want our businesses to fail, but in case it happens).
 
First of all, figure out whether there is any fixed expenses like:
Rent
Utilities
Insurance (business liability and professional)
 
Then, figure out what are your operating expenses, some examples as follows:
Sales commission
Hourly wages (for part time employees, good option when you are new)
Salaries and benefits (you and your employees) 
Supplies
Equipment, maintenance & replacement
Advertising and marketing
Telephone, internet and utilities
I.T. 
 
There is never a universal formula for all businesses on business budgeting or business finance. However, we can sort of lay out some rough numbers for your reference. First and formal, tax is something you NEED to put aside (over and above the HST you collect for the government), take away 15% for that right off the bat. 
 
Fixed expenses should be within 30% of your gross earnings, which rent is usually the most highest. Advertising and Marketing budget is one of the areas which people have no idea who to budget for. Rule of thumb is to budget 10-15% on marketing, while 3.5% is classified as ongoing advertising budget. B2B corporations and industrial companies may spend less than 1% on marketing while consumer based companies may spend as much as 50% of their revenue (note: this is revenue, not earnings) to launch a new product or service. We have all heard this old adage: You have to spend money to make money.
 
Many people do not take any salary at all in the early stage of their businesses, I totally understand who they are coming from, but still, you have to live, correct? A good salary benchmark for yourself is between 6% and 15% of total earnings. Salaries and benefits for your employees should maintain around 18-32%.
 
Any operating expenses should be not be more than 30% of your total budget:
Sales commission 7.0%; 
Hourly wages 5.5%
Supplies 1%
Freight and postage 1.3%
Equipment maintenance 1.2%
Ongoing advertising 3.5% 
vendor services (accountant and lawyer) <10%
 
If your business needs to buys goods for resell purposes, you should always keep total goods costs under 70% of revenue earned (unless you have increased sales). 
 
Always have 3% budget for buffer on bad debts or receivables that going to take long to collect. To minimize this risk, try to do your due diligence by searching your customers or clients' credit with D&B’s global commercial database. 10% of the total budget should address to unexpected expenses, again, 15% for tax due. Among all these, about 20% of your annual budget should be controllable and flexible. 
 
You should always look around to see if you can cut cost and shop around for services and suppliers. And you should review your budget from time to time, the best is to review it every 3 months if you are new to the business, review it again in 6 months and fine tune your numbers. When you are in the business for a longer period of time, you will be able to lay out a much more precise budget for the coming year.
 
Lastly, make sure you spend about 5-7% of your net income on protecting yourself in case you can't work due to accident or sickness, afterall, you are your business, how does your business survive if you were not there?!
 
Good luck!!

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