When starting a new business you will hear a lot about budgeting. You will learn how to write a budget based on the anticipated amount of income on a daily, weekly and monthly basis and how good your budgeting plan is will depend on how disciplined you are in sticking to the established amount you have dedicated to every item in your budget. Of course, it will all depend on meeting your income projections but many businesses fail due to their lack of action when one piece of their budget doesn't fit together to form the perfect picture of their business.
In many instances, businesses budget their expenses based on dollar amounts and with many fixed expenses such as rent and utilities that will be a necessary part of the budget planning. However, expenses will need to vary based on the amount of income the business realizes, often referred to as controllable expenses, and these should always be based on percentages of anticipated income.
One of the largest expenses in nearly every budget is payroll and by projecting your payroll as a percentage of income, and tracking it on a daily, if not hourly basis, you can better control the bottom line of the business profit. For example, you have budgeted sales of $1,000 per day with, for the sake of round numbers, a 10 percent budgeted for payroll. That means you plan to spend $100 on payroll, provided the sales hit the $1,000 mark.
At the end of the day if sales were only $900 and you already spent $100 on payroll, you are now behind in hitting your profit mark for the week. Unless you can make up the difference in the next six days, and remain at 10 percent payroll margin to sales, you will short that difference for the week. Had you been tracking the sales on an hourly basis and knew by noon, for instance that sales were tracking to be $100 short, you could have reduced payroll to still end the day at 10 percent of the total sales by trimming $10 off the payroll expense.
One of the key issues that ruin many businesses from the start is unrealistic forecasting of their income. Many are over confident and estimate their income at a level that requires everything to run according to plan in order to achieve the sales goal. Things like weather and accidents can affect the income model and without taking those potential issues into consideration, as well as being more conservative in income expectations, many businesses set themselves up to fail before they open their doors for business.
How each of your expense items affects the overall bottom line profit is also an area where many businesses fail to appropriately budget. If you have to sell any products or services at less than the forecasted price, it will affect the base dollar amount you have available for other expenses as well as reducing the bottom line. When budgeting, you have to be prepared to acknowledge that lower income on any level will require a reduction in expenses on another line in order to balance the bottom line budget.