Financial Planning and Budgeting
Here at Waterford Business Solutions, we work together with professionals to understand their business and profitability. While understanding pricing, labor, and material metrics is important, another factor small business owners need to consider for success is forward planning. We need to plan for where we want to be years down the line, and to do so efficiently, we should develop a business budget and business plan. Here, we will provide an overview of financial planning and budgeting to set you and your team up for long-term success!
When we’re talking about business planning and budgeting, there is a subtle distinction to understand: No business plan can exist without a solid budget, but you can have a budget without a solid business plan. A business plan is key to guiding your decisions to support your organizational goals. Without a plan, you will only hit your budget by chance. If the goal is to develop an outstanding business plan, we need to start with a great budget.
Budgeting
Surprisingly, business budgeting is straightforward and quite simple. The process of business budgeting involves analyzing historical data, growth, and expenses, and how they interact. You should set your income goals optimistically, but not unreasonably. It should be a benchmark to strive towards, not an impossible standard to demoralize you.
Some of our clients create two budgets: one more reasonable and one idealistic, as they find this more motivating. Most traditional budgets may plan for a year at a time, but this is not very accurate, especially in the trades, where sales can fluctuate significantly by season. In fact, it may be more beneficial to budget quarterly or even monthly!
To create a budget as effortlessly as possible, we can just go line by line down your Profit and Loss Statement, starting with your income. No matter how you have your income broken out, examine your historical growth and estimate what you expect your income to be in the next year (or for the duration of your budget).
This estimate can be influenced by a variety of factors, including changes in advertising, new competitors, and new laws and regulations. To factor in these non-numeric influences, it is recommended that you perform a SWOT analysis of your company.
Once we have an idea of where your income will come from, we can examine your direct expenses to generate that income. To estimate your materials, look at your historical material metrics and apply them to your sales target from the previous step.
You can repeat this process for your direct labor, credit card fees, permitting fees, and any other expense directly related to the job performed. These expenses are primarily variable and can be approximated using historical percentages and sales goals. Next, we will look at your other expenses.
The easiest place to start will be to mark and record your fixed costs. These are costs that will stay consistent even with the projected increase in sales – think rent, salaries, and software subscriptions. To finalize the expense estimations, we should analyze the remaining variable expenses.
These may be influenced by factors other than sales directly. For example, approximate vehicle repairs and gas expenses should be calculated by expected mileage.
However, the most important aspect of budgeting is dedicating time to compare your performance with your budget. If your budget cannot be used to compare with your current performance or to course-correct when an issue is noticed, then it is not a budget – just a dream. When you are making these comparisons, make note of where you are over or under budget. These historical-based benchmarks are great starting points for deeper research and can be insightful warnings of issues both current and yet to come.
Business Planning
Business planning is a bit more complex than budgeting. Business planning requires an understanding of the business both currently and in the future. We need to think through the structural changes that will be needed as your company grows. This is much more difficult than standard budgeting, as metrics and ratios cannot be carried over directly.
For example, let’s look at payroll. As your business grows, you cannot rely solely on historical labor metrics for long-term planning, because as you double in size, you will not double your employees. Instead, you will need to look at how many employees you have, how much you are paying them, whether they will be getting raises, the additional employees you will need, and the training required to get them active.
With this information, you can develop a hiring and training schedule to efficiently grow your business, which is a portion of an overall business plan.
This process can —and should —be applied to every aspect of your company, including vehicles and related expenses, insurance, and even advertising. Once these are all completed and compiled, you have a business plan! Keep in mind that, just like budgeting, your business plan is not law—it should be adaptable and flexible.
As you can see, business planning is in fact a skill, and an impressive one at that! While you can make this plan yourself, it is always better to work with a third party to discuss your plan. If you don’t have anyone playing devil’s advocate —or at least offering their opinion —it will be extraordinarily difficult to keep your plan accurate or reasonable. The Small Business Administration has business guides that can assist you with this and other general business processes: https://www.sba.gov/business-guide.
Once we have a detailed business plan in place, we need to consider the tax liabilities that arise, a process called Tax Planning. We have a blog specifically about Tax Planning that you can see here: https://www.waterfordbusinesssolutions.com/tax-planning-what-does-that-entail/ .
If you need assistance developing your business or tax plan, reach out to us for an initial consultation via email info@waterfordbusiness.com or by calling 864-351-0852. We will continue this series with another blog and video about a software called “Live Plan,” which can help you with your budgeting and business planning. Subscribe to our YouTube channel to see this video as soon as it is released!
