Updated: Oct 12, 2021
You should start developing a budget for your next fiscal year a month or two in advance of the start of your year. A budget is not that difficult to do and is there to help guide you, not to constrain you and your business. An actual budget does not just look at your income statement, but also on your balance sheet.
Revenue Forecast If you have been in business for at least 2-3 years, you should have a run rate and understanding of your annual growth each year. Forecasting not only looks at your prior years and seasonality, but also should look at the plans you have in place for generating new or increased revenue next year, which could include a new product, new pricing, or a new channel to market. The forecast should also include any expected income from customers in the new year.
Cost of Goods Depending on your business, your cost of goods sold is most likely going to increase which includes raw materials, labour, and inbound shipping associated with selling the finished product to the end customer. It is vital to plan for this as it will affect your margin.
Expenses To budget for your expenses, you will need to have an understanding of the changes that will occur within your costs in the next year and see how this will affect your bottom line. With the changes in the minimum wage, your payroll expenses are going to increase. Once you have completed your marketing budget, this should be input into the expense line as well, along with any other changes such as increases in rent, utilities, or insurance for example. You will need to account for any new headcount or expenses that you may plan to spend this year versus previous years such as travel.
Balance Sheet Items If you are developing a budget, you have to look at your balance sheet as well as your income statement items. Here is a list of a few items on your balance sheet that need to be planned for and have an understanding of how this affects your cash flow monthly.
Inventory - make sure you account for the inventory you plan to carry next year as this can affect your cash flow.
Capital Expenditures - if you plan to purchase any capital items, you need to account for them within your budget.
Loans - if you have loans you are paying off or plan to take on next year, they need to be accounted for within your budget.
Cash Flow Planning -Take the income generated from the business and factor the changes in your balance sheet, prepare a cash needs outlook. For example: if you plan to make $50K at the end of the year you need to adjust this amount for funds used in paying off or adding to your debt, buying inventory, buying equipment, etc.