easy ENTREPRENEURSHIP assignment
Building a Budget
The main reason for business failure is lack of cash. Lack of cash happens when cash outflows exceed cash inflows … this is most likely to happen during times of growth, times of high demand, or if you extend credit to customers.
One of the greatest tools for keeping entrepreneurs in an adequate cash position is the budget. The budget is a guess … into the future … of what kinds of cash outputs and cash inputs you’ll likely experience over the next 12 months.
Step 2: Beginning with November, start guessing what your sales, accounts receivable, any cash received from loans will be for the next 12 months. If you have a new business with no sales data, be conservative, guess on the low side. If you have an existing business, take a look at last year’s data and make estimates based on what you feel will happen during this year. In the spreadsheet get a total of “Total Cash In”. This will be the sum of all A/R, Loans and Sales.
Step 3: Once all the “Total Cash In” has been estimated, begin to estimate the “Cash Out”. Think about your sales and the amount of “cost of goods sold” you’ll need to support that level of sales. All your “cash out” numbers will be at your actual cost of purchasing that COG or expense. Fill in all your COGS. Total COGS is the sum of inventory, freight, and (for service businesses) billable hours costs.
Step 4: Estimate all your operating expenses. Take into account seasonality, and how the seasons affect your business … will you need to increase your advertising just before the big sales cycle? Will you need more supplies during your high sales time? Will you need to pay property taxes in November? Will you need to purchase equipment sometime during the year? Line by line, think of what the future will bring and what is a reasonable amount cash that will be needed to pay for those expenses. Total Ops Expenses is the sum of all the expenses.
Step 5: Total Cash Out = Total Cost of Goods Sold + Total Ops Expenses.
Step 6: Net + or – = Total Cash In - Total Cash Out.
Notes: While budgets almost never end up exactly where you think they will, they provide useful information. They will let you know if you need to alter your plan, as there might not be enough money to pay all the bills. They will let you know your break even sales point. If you do need money, they let you know how much and when you’ll need it. Budgets are your best friend when effectively managing a business.
Step 7: Fill out a budget for your business and email it back to the instructor.