Developing a budget for your business can be one of the most useful exercises you can perform. Why? Because it forces you to take a holistic view of your business and describe it in numbers. All of your business’ activity is reduced to dollars and cents, arriving at a figure commonly referred to as “the bottom line”. This budget process can be as complex as producing a sophisticated Excel spreadsheet, or as simplistic as a back-of-the-envelope calculation. Whatever method you employ helps answer the question: How does my business track my needs to earning a living? All manner of benefits accrue from the budgeting process. First and foremost, you can now plan your activities for the foreseeable future. Additionally, having reasonable budget estimates can help you establish pricing strategies. And finally, budgets are goals against which you can measure your performance.
Initial budgets do not have to be that sophisticated. It’s actually better to start out with a fairly rough one, and then improve your model over time as your understanding of the process improves. A typical budget is a simple snapshot of your business over, say, a year’s time. More sophisticated budgets take into account timing differences in cash flows, and the behavior of costs throughout the budgeting cycle. We’ll stick with the snapshot for these purposes.
Start with your financial information for a typical year (general ledger if you have one, Schedule C Business Income from your tax return, etc.). Next you must estimate how many units of widgets or hours of services you produced and sold during that period. How many shows did you do? If you do both retail and wholesale shows, you must separate the two classes. Now you are ready to develop your budget.
Let’s say that in this year you did ten retail shows where you sold a hundred widgets and brought in $3,000 on average. Further, let’s say that your cost of doing these shows (booth fees, travel etc.) averaged $500 and kept you on the road five days. During this year you also did two wholesale shows, averaging 1,000 widgets apiece and bringing in $15,000, at a show cost of $2,500 and seven or eight travel days. For the year, then, you produced and sold 3,000 widgets, had $60,000 in revenue, and paid out $10,000 to do your various shows. Let’s assume that your cost to produce these widgets was $15,000 for the year ($5 each), and that you had overheads/other expenses of $10,000, for a profit of $25,000.
Now you have the basis for a starting budget. One column for retail, another for wholesale and a third for the total. Now you’re ready to budget your business. If everything is the status quo then this is your budget. All you need do is spread it out by month or quarter to take into account the timing of the various shows relative to the timing of your overheads and expenses.
The power of budgeting comes into play when you start modeling the behavior of your business. Yes, you generate a higher unit price at retail shows, but the unit selling costs tend to be higher than for wholesale shows, and they keep you out of the studio much longer — probably three to four times longer for an equivalent number of units. Start playing with your model. If we assume that you work at this full time, say forty hours a week — and that all your non-show time is spent in your facility making product, then you can do a rough calculation of the highest and best use of your overall time. Given a feel for what you realistically expect to sell, you might look at what happens to overall performance if you drop some retail shows and add another wholesale show, or vice versa.