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Home › Articles › Getting Started with Your Home Based Business › Business Plan › Setting a budget for a home based business

Setting a budget for a home based business

Sound business practice demands that any enterprise set a budget in order to guide the enterprise via setting objectives and goals. The budgetary process is essential in allocating a scarce resource such as cash and manpower to areas where that resource will produce the most profit for the enterprise. “More bang for your buck!”, as they say. Budgets can be highly complicated animals constructed by Certified Accountants and budget teams on expensive computer programs. A simple budget will suffice in the case of a Home business. The important thing is not the complexity of the budget but the need to have one, no matter how small the enterprise.

Step one: Determine your monthly expected income

Estimate based on current earnings or projected earnings what your monthly income will be. A conservative growth figure can be used. Set the budget for a twelve month period. Any longer than twelve months becomes very inaccurate. Take heed of the cyclical nature of business. Less income may be expected over holiday periods, or periods of cold weather etc. Your business cycles are dependent on the nature of the product you are selling.

Step two: Determine your fixed monthly expenses

Fixed expenses are simply those that do not vary from month to month in the short term. Examples of fixed expenses are Telephone rental, Internet provider fees, Property rental, Electricity bills. These expenses should be listed separately as they are fixed in the short term and do not vary with the ebb and flow of monthly income. These are the expenses that have to be met whether the business has done well or not that month.

Step three: Determine your variable monthly expenses

Variable expenses are those expenses that vary directly in proportion to the income you earn. A good example of a variable expense is commission paid to a salesman. If he brings in a lot of business he will receive a predetermined percentage as commission. On the other hand if he brings in nothing he will earn no commission and his cost to the business will be zero. Other expenses that fit this description would be telephone call expenses, traveling expenses, gas expenses. The biggest variable expense is of course the cost of the product you are selling.

Once you have determined your income and expenses it is a simple process of deducting the one from the other to arrive at a budgeted profit for the period under review. Profit is what it’s all about and the budget will enable you to set a profit target. Once these targets have been set then it is a simple process to then compare the actual results achieved against the budget.

The budget gives you the power to cut and tweak your expenses to maximize profit. The highest incidence of business failure is the lack of the correct financial information at the right time. The budgetary process will arm the small home businessman with the right tools to control and predict profits and expenses.

How to Create a Successful Business Plan

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