Budgeting: A Scary Word? An Odious Chore? A Non-Necessity?

Budgeting is simply estimating your ability to complete a project, whether it’s a job, an equipment purchase, a new location or a year’s survival in business. Complete records of the prior year help make the budget more accurate, but setting financial goals without records can be done. The hard part is sticking to your budget.

To create a budget, first determine your annual income. Extremely detailed budgets complicate life. Therefore, we try to keep our budget very general. Rather than predicting the income from trucks, electric signs, banners, sandblasting, writing, etc., we prefer to estimate our weekly sales as a whole.

Budgeting requires less guesswork if you know what you generally gross per week. This should be a conservative estimate. Don’t increase this gross amount without a good reason, such as a price increase. Remember, you don’t charge for every hour you work. Twenty percent billable time can be considered quite profitable for a single owner who also must handle bookkeeping, bidding, administration and cleaning.

Determine the number of work weeks in the coming year, accounting for travel and other vacation time, including holidays. With these figures, simply multiply your income per week by your number of work weeks.

We intended to work 46 weeks this year, and we’ll average $4,000 per week, including income from books, magazine articles, antique restoration and retail offerings, in addition to the signshop. Thus, we expected to make $184,000. However, income during January and February was abysmal due to the worst storm season in 12 years. As a result, we began March $14,383 behind the curve. At the end of June, we had to recover $13,908 if we were to meet our expectations. We decided to work 50 weeks and average $3,680 instead, for the same $184,000.

You can estimate your expenses once you’ve estimated income. In our shop, direct expenses include contract services, materials and all other expenses costable to a specific customer. Our direct expenses generally average 30% of sales, so we would budget $55,200 to this category, leaving a $128,800 contribution to overhead (COH). I prefer the percentage method for direct expense.

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Due to their mercurial nature, direct expenses can be budgeted as a percent of sales. Therefore using 30% as an example, when sales are $10,000, direct expenses are $3,000.

Fixed expenses occur whether we’re working or not. They occur 52 weeks a year, even when we’re on vacation, and they don’t measurably increase if we’re working. We include our non-discretionary, non-trackable expenses, like utilities, in this amount. It also includes all insurance, interest on long-term notes, basic amounts for ongoing contracts like communications, and, in our shop, association dues and periodicals. We estimate high utilities, communications and insurance because we’re at their mercy. We consider the increases announced by various services, the current economic predictions, any service changes expected and a three-year history.

This year, after having considered petroleum-based products’ rising prices and the new Colorado minimum wage, we set a minimum increase of 10% of anything Colorado-based and 7% of anything outside Colorado. We have found percentage budgeting to be totally useless on fixed expenses. We always budget this item as a flat amount.

As a small operator dependent upon business income, we also subtract an amount large enough to cover personal sustenance, including fixed expenses plus minimal medical, food and gasoline. Budgeted income can’t be guaranteed, but we assume it will cover personal expenses.

COH – Fixed expenses (business + personal) – Sustenance amount = Spendable funds.

Spendable funds must cover all discretionary, business and personal expenses, from office supplies to gasoline to children’s activities to gardens. Business expenses may come first, but something must be retained for personal spending.

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Normal business expenses can be broken down into regulatory, financial, marketing, shop, office and vehicle expenses. Just because operational expenses are discretionary doesn’t mean you can forego them. This, the largest expense classification, contains day-to-day disbursements essential to operating a business, and budgeting can’t be entirely overlooked.

For simplicity, set a fixed budget for each expense category, either by month or work week. Spendable funds, minus operational expenses, must leave sufficient funds for special business expenses and personal, discretionary income.

Our special expenses include new purchases, business travel and in-kind marketing promotions, but any unusual expenses would apply. These are our most discretionary business expenses. We identify the specific items at our budgeting meeting and research the required costs. We list these items at cost, which results in a flat, budgeted amount. We delete items if we don’t meet expectations.

For example, this year’s horrendous winter resulted in our cancelling an upcoming trip to California; we saved $1,800 in expense and added two weeks to the working schedule.

The second, and sometimes more appropriate, method of budgeting expenses is to reserve a specific percentage of spendable funds for each expense type, including special expenses, and for personal income, totaling 100%. Under this system, budgeted, non-fixed expenses can never exceed spendable income.

No stranger to complexity, I prefer a combination of percentages with minimums and maximums. Percentage use ties expenses to sales. Minimums ensure business expenses retain priority in spendable funds. At a certain point, far above expectations, maximums assure that excess funds are directed to personal goals.

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Regardless of method, budgeting shouldn’t be frightening. You simply predict your financial future. Budgets can be altered if variances arise, and they will. Guessing during the budgeting process at the beginning of the year removes a lot of guesswork later.