Creating an operating plan

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4 answers to questions about this vital business document for your small business

Nan Earll records her baked goods and candy store’s income and expenses two to three times a week. While
she doesn’t have a strict budget, Earll knows which products do well, when to remove one from her shelves and
when to stock up on ingredients to make her sweets.

“I do a lot of tracking rather than budgeting,” she explains. “If something isn’t selling, I get rid of it. I’m constantly
watching prices. That’s a day-in and day-out thing. I compare my sales from month to month and year to year, what’s up and what’s down.”

After 30 years in business, Earll says she doesn’t have an official budget from which she operates. But she still has a handle on her expenses and knows how much money she needs to make throughout the year to compensate for winter months when sales are slower.

Most experts agree that keeping track of the business’ finances, specifically in a budget, is a critical component to
being in business.

“If you’re a new business getting ready to start, you want to have a budget put together before you even open your doors,” says Lisa Shimkat, the state director of the Iowa Small Business Development Center.

A budget, in short, gives the business owner a road map for how well their business is doing and whether they can afford to make purchases. It’s also a requirement of most financial institutions before they will loan money to the business or its owner.

Here are four things to consider about your business’ budget:

1. Why do I need a budget?

Lisa Shimkat, the state
director of the Iowa Small
Business Development
Center, recommends all
businesses have a budget
before they open their doors.

An operating budget, usually created for 12 months, helps track cash on hand, business expenses and projected revenue — all items that are important to making the business grow or to at least keep it afloat, according to Inc., a publication that focuses on small business and start-up news.

Most small-business owners don’t have a budget, says Ann Hartz, a certified public accountant and certified tax resolution specialist based in West Des Moines.

“We’re just lucky if we can get them to do their books,” she says, adding that she recommends all business owners have a budget.

“It’s a way to manage your business and not fly by the seat of your pants,” Hartz explains.

Having the numbers on paper increases the chances of success for the business and allows the business owner the opportunity to spot problems before they grow bigger.

Earll uses her business’ numbers to determine everything from what products to sell to whether employees will receive a raise to determining whether a sale on an item is a good deal.

For example, her numbers help her track the price of items she regularly uses. She knows how much a container of sour cream will cost her, so if she sees it’s on sale somewhere, she’ll buy it at a lower price to save money.

The U.S. Small Business Administration says a budget gives the owner more control over the business. It allows him or her to anticipate peak periods, schedule stock and label to handle sales volume, and even to plan for vacations or time away during slow periods.

Business owners who don’t operate with a budget risk not having insight into how their business performs from year to year, whether there are cuts they could make to improve performance, or whether they have money for larger purchases, according to Inc.

“A lot of times it’s just eye opening to the owner,” Hartz says of an annual budget. “Even doing comparisons year to year are helpful.”

A comparison will show the business owner where something went wrong and point to where adjustments need to be made. Then the business owner can determine whether that adjustment is one that can be made or if a change needs to be in another area, she says.’

“Advertising you can adjust,” Hartz explains. “Insurance you can’t adjust. There are certain things you don’t have any choice over.”

A business’ budget also is important to receiving a bank loan or other financing for the business.

2. How do I get started?

Ann Hartz, a West Des
Moines-based certified
public accountant, says
most small-business
owners don’t maintain a
regular budget.

There is no one-size-fits-all budget for businesses, Shimkat says. That’s why she recommends business owners work with a professional such as an accountant or utilize a local Small Business Development Center (SBDC).

SBDCs provide free services to help business owners develop a budget.

Mark Phillips, Bank Iowa manager of Cash Management Services at the West Des Moines branch, says a professional can assist a business owner, especially those who don’t like bookwork or numbers or think they’re too busy for a budget.

“Pay someone else to do it so you can do what you want to do with your business that ultimately makes the company grow and flourish and helps you meet your goals,” he says.

There also is small-business financial software and budget templates available online through the U.S. Small Business Administration.

SCORE is another potential resource for business owners. It is a nonprofit group, supported by SBA, that utilizes retired professionals and volunteers to help entrepreneurs and small-business owners by giving free business advice.

Business owners are busy, Hartz says. They wear multiple hats to run the business, market it and more. That’s why a tax or accounting professional can assist with financial issues.

“It’s very important to get off on the right foot,” she says. “People think hiring an accountant or having someone else do their books is too expensive, but I feel, in the long run, it’ll pay for itself because you’ll have that management tool.”

Some business owners are unsure of their finances or where their money has gone by the time they meet with Hartz.

“You can’t just say ‘I have money in the bank. I’m good,’ ” she explains. “Or I’ve had the opposite. They don’t have money and feel like they’re broke, but when I’ve done their taxes, they’ve actually made a profit.”

If a business owner has a budget from the previous year, he or she can use it to write a new budget. Those projections, combined with actual income and expenses, will help form estimates for the next year’s budget.

A budget will be developed from a business’ sales and profit targets. If the owner has been in business for a while, he or she can use recent financial statements, pulled from a ledger or computer software program, to develop targets, according to Inc. Sales and profits will dictate how much the business owner can spend.

Financials also should be pulled to show how much the business spent. If the business is a startup, the owner will have to brainstorm any potential costs he or she could incur and compare that with similar businesses in the industry.

If the business owner needs a loan to start the business or to cover a cash shortage, they’ll need to work with a banker or lending institution.

Phillips says a budget is important because it means the owner has thought about the future: How will they continue to grow their business? How will they pay more employees? How could they offer benefits to
employees?

Before approving a loan, he looks for business owners to provide information about why they need the money, how their business compares to similar ones in the industry and how the bank will be paid back. That information can be derived from the business’ budget.

“If you don’t know what you’re spending or what the project is going to cost or what the project is going to make the company, there’s no way to help you,” Phillips says.

Hartz says business owners can help themselves by using a software program such as QuickBooks to keep track of bank statement information, spending and profits. They can use that information to compare reports each month, to determine whether the business is growing and to see where they are spending money.

3. What does the budget include?

Mark Phillips is Bank Iowa manager of Cash Management Services in West Des Moines.

There are several components to a budget:

1. Expenses that are fixed, variable and semi-variable. Try to account for inflation and potential price increase,
experts suggest.

• Fixed costs remain the same. This can include rent, leased items and insurance.

• Variable costs relate to sales volume. This can include cost of materials to make products, freight or shipping costs, and inventory expense. It also includes holidays that are important to the business where the owner may need to purchase more inventory to meet demand.

• Semi-variable costs are fixed costs that can become variable when business ebbs and flows. This includes salaries or advertising expenses.

2. Start-up costs for a new business

3. Annual operation costs

4. Anomalies that could skew the overall budget such as a huge expense

5. Expected revenue based on either industry comparison projection or a previous business or previous year’s
records. Experts recommend erring on the side of caution and to be conservative with revenues.

6. Profit/cash flow to see if there is money available after all bills are paid for improvements, extra equipment or other capital projects.

“While you can’t predict everything, putting the budget together better minimizes the risk,” Shimkat says.

Earll, the owner of Nan’s Nummies, uses her numbers to spread out her expenses, so her income can support the business throughout the year. She knows Halloween and Christmas will be big money makers. Sales slack off during January and poor weather.

“You try to budget as much as you can, but in my business, we’re kind of weather dependent down here,” Earll says. “It took me years to learn that.”

Hartz says it’s important the business owner also budget for their own salary.

“Include a salary for yourself and then shoot for a 10 percent to 12 percent profit,” she says. “That would be
comparable if they were doing the same job in the private sector.”

4. What’s next?

Nan Earll, owner of Nan’s Nummies in Valley Junction, scoops cookie dough onto a tray to be baked. Earll keeps track on a weekly basis of products that don’t sell well and how much waste she has.

Business owners should utilize their budget to determine whether the business is meeting financial or production goals. The budget needs to be updated and reviewed at least once every month with actual expenditures and revenues.

“The bottom line is we need (the business) to make money, and we need to make this business stronger and
have a strong foundation to serve the community they are in,” Shimkat says.

Line items within the budget can show the business owner whether he or she is underspending or overspending
in a particular category if the budget is regularly reviewed. For example, if sales are slow, the business owner
might compare how much money he or she spent in advertising and marketing efforts compared to the amount that was budgeted.

Earll’s numbers also show her whether the business is doing well enough to offer raises to employees. She reviews the year’s sales and expenses at the end of the year. She uses part of her annual profit to pay off debt and then determines what is left to pay any raise.

“There are years I can’t give raises,” she says of her two full-time and six to eight part-time employees. “There was a five-year period when I couldn’t give a raise. It all depends on sales.”

The budget can also show if the business keeps too much inventory on hand.

Earll’s tracking of sales helps her produce only the most popular items that sell and focus her attention on those.

“If something isn’t selling, you’re throwing away more of it as stales,” she explains.

Earll also orders less merchandise when sales are slower. For example, she might order one box of candy she sells in the shop instead of two. She also makes cuts in her personal life and pays herself less so the business isn’t affected.

A budget can better position the business owner with his or her competition by showing how many items the business needs to make per day, how much it charges compared to its competitors, and whether it’s marketing its product appropriately, Shimkat says.

A business owner should review his or her performance to budget at least once a month, if not every week, Shimkat says. This will show whether the business owner has enough money to make a large purchase or pay employees and whether a short-term loan could cover a cash shortage. It also shows the business owner the gap in making a product and selling it versus when he or she is paid for that product, as well as how much product he
or she needs to sell to make ends meet, she says.

“If you’re looking at six weeks before you get paid for something, that helps us figure out there’s a gap in payables and receivables,” Shimkat says. “They might need a short-term loan as they build up the business.”

A business owner also should have his or her financial adviser review the budget each year rather than just relying on last year’s budget, she says.

Earll does her own bookwork two to three times a week and compares her sales to previous months and years in order to stay on top of Nan’s Nummies’ financials, but she still meets with an accountant each year to discuss the overall financial health of the business and to receive assistance with her taxes. ♦

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