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How To Prepare a Budget for a Service Business

A Step by Step Guide to Budgeting in a Small Business

How To Prepare a Budget for a Service BusinessBudgeting is a tool for dealing with the future. It helps you turn expectations into reality.
An increase in profit should be the first consideration when you think about the prospect for your business in the next year. Working up a budget helps you to determine whether or not your profit goal is within reach.
When the figures are all together, you have answers to questions such as: What sales will be needed to achieve the desired profit? What fixed expenses will be necessary to support these sales? What variable expense will be incurred in producing the services?

Table of Contents

1. Introduction
2. Why Budget
3. A Plan For Increased Profit
4. Can You Reach The Goal
5. Budgeting Example
6. Where Can She Go?
7. Periodic Feedback And Control

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Sample Content

Budgeting is a tool for dealing with the future. It helps you turn expectations into reality.
An increase in profit should be the first consideration when you think about the prospect for your business in the next year. Working up a budget helps you to determine whether or not your profit goal is within reach.

When the figures are all together, you have answers to questions such as: What sales will be needed to achieve the desired profit? What fixed expenses will be necessary to support these sales? What variable expense will be incurred in producing the services?
Because business is not a cut-and-dried affair, the first budget often will uncover problems and suggest choices. Working up additional budgets will help you decide what changes to make in order to have a workable plan for next year.
Many owner-managers run their businesses without a planned goal. In trying to survive from week to week and from month to month, such owner-managers overlook an important management tool-budgeting. Whether the plan is for next year, for the next 3 years, or for the next 5 years, budgeting can help just as a map helps you to keep on the right road.

Why Budget

A budget is a plan that enables you to set a goal and list the steps which are necessary to reach that goal. Thus, a budget helps you think about what you want your business to do in the future. By planning, you are in a better position to act to prevent crises.
In its simplest form, a budget is a detailed plan of future receipts and expenditures - projected profit and loss statement. Thus, once the period for which you have budgeted is completed, you can compare actual results with anticipated goals. If some of your expenses, for example, are higher than you expected, you can start looking for ways to cut them. Conversely, if you have fallen short of your goal, you may want to look for ways to increase your income.
Budget makers can start either with a forecast of sales and work down or with a forecast of profits and work up. Most businesses use the latter method. In other words, you decide what profit you want to make and then list the expenses that you will incur in order to make that predetermined profit.

A Plan For Increased Profit

Before you can use a budget as a plan for increased profit, you have to be sure that your present profit is what it should be. In a service business, the year-end profit should be large enough to make a return on your investment and a return on your own work-pay.
Value Of Owner's Service. Skilled crafts people who own service businesses are kidding themselves if their firms' profits are less than they can earn working for someone else. Your net profit after taxes should be at least as much as you can earn if you worked at your trade for a weekly pay check.
Return On Investment. The year-end profit is too low it does not also include a return on the owner-manager's investment. That investment includes the money you put into the firm when you started it and the profit of prior years which you left in the firm - retained earnings. You should check to be sure that the rate of return on your investment is what it should be. Your trade association should be able to provide guidelines about the rate of return on investment in your line of business. Your accountant and banker are also sources of help.
Your Targeted Income. After you know what you made last year, you can set a profit goal for next year. Be sure that your goal includes a return on your services and a return on your investment. Your goal should also include an amount for State and Federal taxes. For example, if you want to make 10,000 after taxes, your goal before taxes should be about 13,333. You have to add this 3,333 to take care of State and Federal taxes. Keep in mind that the larger the goal, the larger the amount which will have to be added to account for taxes. Your accountant can help you determine that amount.

Can You Reach The Goal

Once you have decided on your profit target, the next step in preparing a budget is to determine whether you can achieve this. To do this, you must project your fixed costs and your variable costs. From these three figures - profit, fixed expenses, and variable expenses - you can determine your "hoped for" total income.
In gathering figures, keep in mind that without accurate information planning becomes guessing. The owner-manager who has never budgeted should talk with an accountant about a recordkeeping system. Changes may be needed to provide the necessary budget information. It may be that your present system does not break costs down into fixed and variable expenses, or it may be that you need to have a profit and loss (or income) statement at more frequent intervals to determine the seasonal fluctuations of your revenues and expenses.
Fixed Expenses. Regardless of sales, fixed expenses stay the same. Several examples of fixed expenses are insurance, rent, taxes on property, wages paid to salaried employees, depreciation of equipment, interest on borrowed money, building maintenance costs, office salaries, and office expenses.
Variable Expenses. This type of expense varies with sales. In some service businesses, the cost of labor is the biggest factor. Sales commissions, payroll taxes, insurance, advertising, and delivery expenses are other examples of variable expenses.
Determine Your Expected Service Income. Your expected service income contribution is the difference between sales and the variable expenses that are necessary to produce these sales. When this difference equals fixed expenses and the desired profit, you have a workable budget.

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