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Thursday, February 18, 2010

Budgeting for your small business

Let’s pretend that you’ve just thought of a great agricultural business idea and you want to jump right into becoming an entrepreneur. This sounds great, but there are many steps missing in between the “great idea” and actually opening a business. One of those key steps is creating a budget. A business idea may sound great, but you can’t go anywhere with it if the idea isn’t financially viable. To assess the financials of creating a business (and maintaining it), you must create a budget.
The purpose of a budget is to carefully map out how you will spend your money (and how money has been spent in the past). What exactly should be included in a budget? Very simply, a budget should show where you will be spending your money. This may include rent or mortgage, utility bills, payroll expenses, supplies, etc. A budget is not a one-time creation, but a living, working tool that will help you plan for the future. If an unexpected problem arises (like a sudden increase in supplies), you should go back to the budget and evaluate how this problem will affect your profits.
The intention of a budget is not to intimidate you, so don’t make it so complex that you can’t understand it. Your budget should be specific so that you can see where you may be over-spending (or under-spending in the case of expanding your business), but it shouldn’t be so complex that you are spending all of your time and energy on it. For example, office supplies are an expense that should be included on your budget, but is it really necessary to calculate the cost of using 15 paper clips per week? If budgeting in general is not your forte, consult a professional. In a recent article on Openforum.com, author Trent Hamm suggests getting the help of an accountant. “The more eyeballs you get on your goals and plans for future spending along with your records of how you currently spend, the better off you are.”

Openforum.com article


Investopedia.com is a great resource for learning about budgeting and other types of financial planning for your business. In one article, they list 6 tips to help you create a budget that will help you plan for the future of your business.

Tip No.1: Check Industry Standards
Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the local library for information about the industry, speak with local business owners, and check the IRS website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings. Small businesses can be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors, so you only need to look for an average here, not specifics.

Tip No.2: Make a Spreadsheet
Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc.

Tip No.3: Factor In Some Slack
Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money put away or coming in before expanding the business or taking on new employees.

Tip No.4: Look To Cut Costs
If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting. Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors.

Tip No.5: Review the Business Periodically
While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.

Tip No.6: Shop Around for Services/Suppliers
Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.

Investopedia.com article

As an agricultural entrepreneur, how has budgeting helped you plan for your business’s future? Has your budget helped you realize an area you were over-spending or under-spending? Do you have any advice for those thinking about starting an agricultural business?

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