In our post, Profit: for purpose and pocket, we discussed how our expenses tend to rise to meet our incomes. In business, that means no profit.
You can avoid this by getting all your ducks in a row with proper planning and budgeting.
The last element of the profit-and-loss budget is overhead expenses.
Let’s look at a few things to keep in mind when budgeting for our overhead expenses:
There are some expenses that remain constant no matter the extent of the sales activities;
Other expenses vary according to the extent of sales, but are not seen as part of the Cost of Sale;
There are also seasons of expense. For example, bonuses are usually only paid once a year.
The type of industry will dictate the expenses you incur, as well as the number of variable expenses and seasons. There will most likely be more variable expenses in a manufacturing business, and very few in service- or retail-based businesses.
The difficulty most people face, when doing a budget, is getting all the expenses down on paper.
Here are some of the ones most often forgotten:
· Accounting fees;
· Bank charges;
· Companies and Intellectual Property Commission (CIPC) annual return;
· Consumable assets (see below);
· Repairs and maintenance of equipment or premises; and
· Unemployment insurance (UIF);
· Workmen’s compensation.
Don’t forget your social and spiritual responsibilities. It is important to plan for these commitments and budget accordingly. The temptation is to think that you might provide for both once you start making a profit, but you should set your target profit first, and then work backwards.
Keep an eye on The Springboard Academy website over the next few weeks to claim your free financial model template.
Record your assets
While you planned your structure, analysed your market and decided on your business’ production capacity, you might have realised that you require some equipment to get your new venture up and running. These items are called assets.
The less expensive items will be treated as consumable assets in your expenses list, while the more expensive ones will be recorded as assets which depreciate in value over their life span.
Make a list of what equipment you have or need, what each piece will be used for, how much each piece costs, and the cost of installation and commissioning each piece of equipment.
You also need to know who to employ to operate the equipment and research the market rate for that person’s services. All of this will assist your cash flow and financial planning.
Check out next week’s blog post for more about cash flow. In the meantime, happy planning!
Calling his disciples to him, Jesus said, “Truly I tell you, this poor widow has put more into the treasury than all the others. They all gave out of their wealth; but she, out of her poverty, put in everything—all she had to live on.” Mark 12:43-44