How to create a budget for your online business

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Budgeting 101: Creating an annual budget for your business

A budget is an aspect of running an online business that many people ignore, but can be just as valuable as your business plan. What a budget does is answer the question "What is my business going to do next year?".

Now, when you're dealing with an online business (especially if it includes eBay), that can be a really tough question to answer. Will fees go up? What direction will my sales go? Will my suppliers change their prices? Is USPS scheduled for another rate increase? Some of these you have no idea about, some of them you can estimate, and some of them you can predict with some possible chance of accuracy.

The #1 rule of putting a budget together is to remember - its just a projection, a goal, a target. You're trying to predict what can sometimes be unpredicatble.

There are several things to consider when preparing your budget

Gather this information, or be thinking about these things when you're ready to start

Most home businesses operate on a calendar year fiscal year (January through December) - to synchronize their business year with the IRS tax year.

What I do to set my budget is to start with the previous year's end-of-year numbers as a base. I calculate the monthly average for my main revenue & expense items, and then adjust those for seasonality in my business, and any major changes in my business play for the next year. For example, if I plan on opening a new website, I'll add in planned costs to get it up and running and project sales it would generate for me. My online business covers multiple products with their own seasonality. My handmade doll clothes and handmade bear clothes historically have had the majority of their sales from September through December. So I usually shift more dollars into those months and away from the slower summer months for those venues where I'm selling my handmade items.

For example, let's assume I sold $1200 from my website in 2006. When calculating my budget for 2007, I'd start with a base of $100/month. I'd then decrease the summer months by probably $30-$40/month and increase the September-December months by the same amount. You can also go back and review your sales figures by month to determine any other trends. Valentine's Day is becoming another good holiday for me, but not as strong as Halloween & Christmas, so I might bump January up by $25 or so.

The important thing isn't to be perfectly right in your projections, in my opinion, but to have a goal & a plan in mind. Assembling a budget makes you think about what your plan for the upcoming year is, and sometimes making that step in itself can be a huge benefit to your business.

Questions to consider when preparing your budget...

...as well as information you'll want to collect to help you in preparing your budget.

Is your business fairly steady throughout the year, or do you have peak selling seasons where you sell more (and spend more in fees)?
Is your business spread over several venues? You'll want to consider each venue separately and prepare a budget for each, and then roll the individual pieces into the final budget.
What expenses are you anticipating increasing next year? eBay fees, USPS rates, cost of goods from your suppliers, cost of mailing supplies, webhosting fees, auction management tool fees - there are a lot of expenses potentially involved in your business. Some of them you can lock in for long-term (i.e. signing up for 5 years and paying up front) and get a discounted rate. Then you can expense one piece each year that the agreement is in place.
What are your cash needs for next year? Will you be investing in office equipment, storage space, renting a storage unit, hiring staff? These will effect the expenses that you have, and need to be budgeted.
Now that you've considered your expenses, what about your sales? Expecting to add new inventory, or close out a line of merchandise that has been slow moving? Thinking about your plans for the next year, will help put the numbers together.
Finally - pull the previous two years actual numbers so you have some historical perspective. If you averaged $50 a month in eBay fees the past two years, and you plan on selling about the same amount next year, a budget of $50/month in eBay fees makes sense (maybe increase it to $55/month if you anticipate a fee increase).

If you're using an accounting software package,

input your budget for each account.

Then each month as part of your monthly financial process, compare your actual figures to your budget to see how you're doing. If you're finding your overbudget in an account, analyze it to figure out why. For example, Postage Expense is overbudget by 10% - why? Did you not account for the USPS rate increase correctly? Are you shipping more international items than you used to, at higher costs? Are you selling more - and shipping more - therefore spending more?

This also works when you're under budget - if eBay fees are underbudget is that because you're listing less to core, stopped using Subtitle and Gallery, or getting more Store Referral Credits than you did in the past.

There are additional analysis you can do in relation to your actuals vs budget. Let's say you planned on eBay representing 75% of your sales and planned on selling $1000 a month - are you actually hitting those marks? Maybe you're selling $1000/month, but 50% is from eBay, and the other 50% is from your other venues (I think its always a good thing to diversify your business beyond eBay).

Don't overlook the potential of other income sources not directly tied to the sale of products. These kinds of items would include interest income on investments, Squidoo income, and Affiliate income. There is something very satisfying about being able to make a bit of money when someone ELSE makes a sale - you don't have to ship anything, or list anything, or write the description, or pay the eBay fees, and you get a piece of the pie.

If you need an accounting software package to help with this process, I recommend Peachtree Accounting (which is what I use). Quickbooks is also another program that comes well recommended.
If you're ready to invest in a software package, I'd have to recommend Peachtree Accounting based on my personal experience with it, although another popular product is Quickbooks. I've provided links below to the two 'starter package' level versions of each software so you can compare them.

Sage software Peachtree First Accounting 2008

$59.99

How to create a budget for your online business

Budgeting 101: Creating an annual budget for your business

There are several things to consider when preparing your budget

Gather this information, or be thinking about these things when you're ready to start

Questions to consider when preparing your budget...

If you're using an accounting software package,

input your budget for each account.

Here are some links to help you put together a budget

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