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Budgeting for the Coming Year
Budgeting for the Coming Year
Now that we're in the fourth quarter of the year, it's time to get ready for 2013. There is much to do from a financial, legal and tax perspective. In this article are guidelines for mapping out your company’s financial plans for 2013. In upcoming articles, you’ll see what legal steps you should take and last-minute tax planning moves you should make before the end of the year.
Overview of budgeting
Budgeting is a process in which you estimate the income you expect your company to receive as well as the expenses you expect it to incur during any fixed period, typically for the year. This helps define your marketing and sales efforts and your spending habits for the coming year.
Admittedly, there is a lot of guesswork because the future is uncertain. However, budgeting provides a framework in which to operate. You can deviate from the budget during the year as things change. For example, when your revenue is running short of your projections, you’ll need to reexamine expenditures accordingly (besides figuring out why revenues are lagging).
The first step in budgeting is to review your current financial position by listing your revenue and expenses for the year. Your accounting software can easily help you organize your financial data to help you with budgeting. For example, in QuickBooks, go to the Report Center for help.
The linchpin for any budget is a realistic projection of your revenues for the coming year. This is not a number made up of hopes and wishes; it is based on a review of revenues for the current year and what you can expect to do in the next year.
Now project your outlays for next year. Start by dividing estimated expenses into two categories: fixed and variable.
Fixed expenses are those that are certain to be incurred and do not vary with the amount of sales you generate, such as rent and insurance premiums. Variable expenses are those dependent on sales, such as inventory costs. You likely will have a number of semi-variable costs, such as wages, travel and entertainment (T&E) costs and marketing expenses.
Use estimates by the experts for rises in wages, insurance, fuel, travel costs and other expenses to help you make projections. For example, the federal government short-term energy outlook expects regular gasoline retail prices to average $3.43 per gallon in 2013. Projections for pay increases are about 3%, as noted by the *Employer’s Resource Council (ERC).
You don’t want to work for free, so be sure that your budget allows for a profit on your activities. As you know, profit is what you have after subtracting your expenses from your revenue. (There are more calculations, such as reducing gross profits by taxes on those profits, to determine what you can actually pocket at the end of the year.) No one can tell you what profit you can or should make, but again, be realistic. Compare your projection with profits of small business within your industry at *BizStats.
Putting it all together
Budgeting is an art, not an exact science. Be sure to build in a "fudge factor" to account for the unknown. Some unknowns that can throw your budget out of whack, unless you add a cushion, include:
- Inflation. This rise in the overall cost of goods and services means that your buying power decreases, so you’ll want to account for this possibility. While inflation has remained low in recent years, economists warn that the high federal deficit and other factors could trigger higher inflation in the near future. What's more, the inflation you experience may be higher than the official rate of inflation.
- Fuel costs. All businesses are impacted by a greater or lesser degree by the cost of gasoline and other fuel. For instance, if your company makes deliveries, the price at the pump affects you in a meaningful way.
- Interest costs. If you have outstanding loans with variable interest rates and those rates rise, then the cost of servicing this debt will also rise.
Next year, as you put your budget into play, be sure to monitor it continually. If you were overly optimistic about sales, you'll need to trim your spending or figure out how to increase your sales revenue so you don't run into financial problems.
Get input from your staff about what may be needed next year, such as additional employees, new smartphones or equipment upgrades. Use your accounting software’s budgeting tools to help you create your budget for 2013. If you need help in constructing your company’s budget, work with your CPA or other financial advisor.
*Denotes a link to a non-government Website.
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