Building a Small Business Budget from the Bottom To The Top - Part 3

Again, we continue our subject about How To Building The Budget by the 3rd part as the following:

4- 2- Services:

If you are in the service business, your inventory is your time. The building blocks for budgeting rervenue in this case are the number of billable hours available, and the rate to be charged per hour. Hours and rates should be broken down by person, if the business involves different persons performing different functions.

Billable rates may vary, depending on the person’s qualifications and experience. And billable hours may vary depending on the person’s functions. A person dedicated almost entirely to customer service will have a different number of billable hours than a person who primarily performs administrative and support functions. The nonbillable hours may be factored into the billable hours, by incrementing the billing rate to be charged. Or the nonbillable hours may be left out and absorbed as overhead within the operating expenses.

Here again, market dynamics will need to be taken into consideration. But you can reasonably estimate your revenue by determining your billable hours per month times the rate you expect to charge.

5- Jobs or projects:

If your business involves jobs or projects, budgeting will probably include aspects of both product and service revenue budgeting. Based on your line of business, you will know what is involved in completing the job or project. The work may involve materials and supplies, direct and indirect labor, use of equipment, and maybe subcontractors. Budgeting for jobs or projects may go hand-in-hand with submitting job estimates or bids. The terms and conditions of the work will play an important role in how the work is quoted or budgeted. A lump sum contract for a particular job is different from a fixed rate contract, for instance.

Breaking down the job into its component parts will be a key factor in submitting a good quote or bid, and budgeting job costs and revenues. You will want to make sure you have all your bases covered, in the sense that you include all your costs, both direct and indirect, and allow yourself a sufficient margin. You may need to make out a materials list, a job schedule for direct labor, and an allocation calculation to include indirect expenses. If you are going to use subcontractors, you should get bids from them, hopefully before committing yourself to the job.

If your business involves jobs that extend over a longer period of time, first you will want to make sure the amount you are charging for the job is sufficient to cover all your expenses and leave you with a margin that gives you an adequate monthly income during the period you are working on the job. You can budget monthly revenue and cost by spreading the total job over the months of work.

If you are working on several jobs at a time, you can use your timelines for each job, and then allocate the total revenues and costs for all the jobs over the applicable periods in order to come up a monthly budget.

6- Expenses:

xpenses can also be broken down into components such as quantities, prices, and rates. Some expenses are basically incurred as a function of usage, for example materials and supplies. Other expenses are correlated with time periods, such as rent and insurance. The types of expenses your business incurs will depend on your line of business, and the following are just some general examples of how you may be able to budget, by breaking down the expenses into their component parts.

Employee compensation can be budgeted based on the hourly wages or monthly or annual salary contracted with each person. You will need to budget for employer payroll taxes, which can be calculated using the applicable rates for Social Security, Medicare and unemployment taxes. You will also need to provide for any benefit plans you have agreed upon with your employees, such as health insurance, pension plans and others. If you have actual data on the cost of these plans, all the better. If not, you may want to budget based on a payroll burden, which is a percentage of employee base compensation.

You may have other employee-related expenses such as bonuses and awards, that are tied to the completion of objectives or goals. It may be possible to correlate these expenses with a related item in the budget, such as sales.

If you plan to pay sales commissions to either your own employees or outside salespersons, the budgeted commissions expense will be a function of budgeted sales. If you use an advertising agency, you should budget based on the contractual terms. Advertising in telephone guides or on-line services can be budgeted based on their quoted rates, according to the type of ad you want to place.

Rent of property or equipment can be budgeted according to the monthly lease or rental amount. Insurance is generally prepaid, and you can do some accounting to spread the quoted insurance premium month-by-month over the policy period.

If you have a periodic preventive maintenance contract on equipment, you can budget based on the monthly cost of your contract. If you have purchased an extended warranty, you can spread the cost over the expected useful life of the related equipment, or the duration of the contract. Repairs are generally an unforeseen expense and are more difficult to predict and budget, but they should not be overlooked. You should probably estimate repair expenses based on your own knowledge and experience, and based on the age and general working condition of your equipment and facilities.

Utilities, such as electricity and gas, can be calculated as usage times rate, if you have an idea of how much you will use. You may be able to estimate usage based on a reference point, such as a similar business or facility, and multiply by the going rates in your area for electricity and gas.

Budgeted telephone expense can be based on the plan you have for your cell phone, for example. The base monthly rate and installation cost for a new land-based line can be obtained from your local telephone company. The expense for long-distance calls will depend on the nature of your business, and here you will have to estimate based on your judgment and personal experience.

If you use your vehicle in your business, you can estimate the average number of miles or kilometers you expect to drive each day or month. Then take this and multiply by the appropriate factor based on how many miles or kilometers your vehicle gets per gallon or liter, and the expected price of fuel. You may be able to budget travel expenses by estimating how many trips you plan to take to what places, and find out the going airfares and hotel rates.

You probably know what types of insurance coverage your business will need, and you may be able to get quotes on-line. Or you could go to an insurance agent and inquire.

Depreciation expense is based on the cost or basis of your appreciable property and equipment, and the depreciation method you use. This may be straight-line depreciation over the useful life of your property. Or you may elect to use another method, such as the accelerated recovery system used for income tax purposes. Your budgeted depreciation should coincide with the depreciation method you intend to use for book purposes.

Finally, interest expense will depend on the loans your business carries. At the outset, you may not yet know what these will be, since this will depend on the financing you are able to obtain. Your initial budget for interest expense could be based on the amount of financing you need, times the applicable interest rate for each particular type of financing. For example, financing with your credit card will generally carry a higher interest rate than a mortgage loan, secured by real property.

As mentioned above, these are just some examples and ideas, and you will need to adapt them to your own particular circumstances. The important thing is to analyze your expenses, and break them down into pieces of data that can be identified.

to be continuing at part four

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