Creating a budget for the new year

[Guest]

After 6 years of being online, you'd think I would have already done this, especially as much as I track my website numbers. Anyways, I was compiling a few basic numbers from 2008 and realized that I now have 3 years worth of numbers that are relatively consistent -- gross income, affiliate commissions paid out, education expenditures, and so forth.

Once I realized what I had, I knew that I could put together a rough budget for 2009 to pre-plan many of my expenditures, rather than fly by the seat of my pants, as it were.

Part of the reason I'm posting this is to help those who are just starting out. I know I wish someone had given me a basic idea of what I should expect to spend in several categories. The other reason is to get some feedback from others to see how common these figures are.

Here's what I have: (percentages represent percentage of gross sales):

Promotions: 25% (mostly affiliate commissions and PPC ads)

Education: 5% (books, CDs, online memberships, etc.)

Product Supplies: 3% (supplies used to create limited physical products)

Office Equip.: 3% (computers, printers, etc.)

Office Supplies: 2%

Software: 2% (both office software and web software. I use Linux, so most of my office software is free.)

Creative Service: 2.5% (graphics, skins, etc.)

Payment Processing: 5.25% (includes gateway charges, batch processing, etc. besides just individual transaction fees.)

Misc.: 8.00% (anything that doesn't fit into its own category)

I didn't include things like shipping, web hosting, and other things that are either paid by the customer (shipping) or are fixed costs (hosting). I also didn't include things like debt reduction or interest, nor did I include a salary for my own time.

[Guest Brivtech]

I'm quite surprised you never made a business plan when you started your business that should have contained forecasts for all this information.

We create a business plan each year, seems like a load of extra work, but it helps set out our goals and agenda. Forecasts don't always work out, but they give you something to work against, and as you start to alter the yearly forecasts to become more based on actual figures, they become more accurate.

[Guest]

I hear what you're saying, and the various business books I read in the past agree with you -- that you make a plan with forecasts before your business even starts.

One of the reasons I never made any forecasts was because I had no idea what to expect. I didn't know how much to budget for expenses like educating myself on how to run the business, or having custom graphic created, or any of the other stuff.

My thought was that I'd do what I had to do, and try to keep all my expenses as low as possible, spending only what I felt would be a wise investment at the moment.

In retrospect, I probably should have spent more on my business and marketing education in the first couple of years. If I had to start over, I probably would find someone successfully running an online business and hire them to help me get started, in effect, 'borrowing' their experience and knowledge of what represents a good educational investment.

Software and equipment would also be a much higher percentage in the first year. That's when you're setting everything up, and the initial investment can be significant, especially if you make mistakes and have to purchase different software that works the way you need it to work. There again, an experienced business coach would be very helpful.

Hopefully, the numbers I've posted can help someone else just starting out to know what to expect, at least what to expect after a couple of years of being in business.

In your experience, Brivtech, do these percentages change significantly based on the size of one's business? Should I expect to have similar numbers when I reach 7 or 8 figures per year?

[Guest]

I never have done a business plan or budget either and I've been doing this since 2001 Honestly, never even considered it. I do keep an eye on my monthly sales figures and compare it to the previous year (which have always been up so I don't worry beyond that), but other than that, I don't pay attention. I've always been math challenged so truthfully, I have no clue how to figure out percentages and what % of my sales I use for what.

I started the business as a part time/extra money venture though and its only been my sole livlihood for 4 years. As long as my sales keep going up though, will probably still not bother with budgets or business plan. I do create goals - what I would like to accomplish this year, what equipment I would like to add, etc. But just do it as I go rather than totally planning (I'm a flighty Pisces..can't you tell? lol).

[Guest Brivtech]

In England, most of the banks now request that you have a business plan before they will open a bank account for you.

For my first year with the internet business, I had no idea what my forecasts were, and I grossly over-estimated them, however I was able to correct this for year 2, with a far more conservative estimate. I'm able to now better predict my growth, although forecasts are rarely the same as actual sales. The trick is to use the business plan to simply help you focus on what you are doing for the business.

As far as the percentages go, you'll find that the costs will decrease and the profitibility should increase - Unless you open new offices, etc. those types of costs mostly stay the same - As far as hardware and software costs go, I would build in an annual (upgrade) cost even though much of the cost was made when you first set up - The reason is that there will be unexpected costs in the future (I just had a monitor blew up, so had to replace it), which can adversly affect cash flow if you don't allow for it.

It would help to talk to your accountant (if you are declaring your income as a proper business/self-employed) as there are also some tax and expenses concessions you can make wen working from home for instance. I know that a lot of internet-based businesses are home-starts, done as Mysty says as a hobby, but often work out becoming a full time career.

Wheter you want to use a business plan ad do cash forecasts or not, I'd suggest that it's a good excercise to follow, even if you don't eter all the information. Wach for hidden costs - I had a friend who was chauffeur driving for a year and didn't earn ay money - He hadn't taken hidden costs into account, and was spending all his profits on car cleaning and coffee/lunches while waiting for clients. You really should factor a salary in from the beginning - You're the one who needs to earn a living after all.

[Guest]

... I have no clue how to figure out percentages and what % of my sales I use for what.

Actually, this is quite easy, and I usually do this from the numbers I gather together to fill out the tax forms (1040 Schedule C, mostly). In the process, you generally add up all your expenses in a particular category, such as advertising expenses, office expenses, and so forth. Once you have all the totals, the percentages are calculated by simply dividing the total spent on an expense category by your gross sales.

Let's say your gross sales in a year were $100,000. And let's also say that you spent $5,000 on office expenses (upgrading computers, toner, paper, etc.). In this case, your office expenses (as a percentage) are 5.000 divided by 100,000, or 5%. (In my budget, I split this category into equipment expenses and supplies as a separate category.)

Let's say in the same year, you spent $15,000 on hiring professional services (legal, accounting, marketing, artistic, etc.). You can find out the percentage by dividing 15,000 by your gross sales of 100,000 and get 15% as a result.

What I've found is that if I budget $7,500 for business and marketing education, I can feel better about wanting to spend $2500 on a high-level marketing course, as long as I only do two per year, saving the rest of the budget for misc. books and such from my field. When my business grows to the point where this category is allowed $20,000, then I can do a lot more live seminars and coaching programs.

Brivtech, when I consider the prospect of setting a first-year budget, my initial impression is to estimate gross sales to be double the promotional expenditure. And in this, I would count time used for pursuing 'free' promotion as well. Obviously, the actual number depends on a great many factors -- what market you're in, what product(s) you have to offer, any reputation you may be bringing to the business, marketing skills, etc.

For someone setting up a typical online store, selling stock items dropshipped from a wholesaler, with no previous marketing experience, and with no pre-existing identity in the marketplace, I would suspect the 2X promotional expense estimate to be about right. In this situation, marketing costs represent 50% of gross sales, with the other 50% covering product costs, administration costs, and wages for any assistants. Most of the promotional expense goes towards creating a presence in the market, as well as the various mistakes that most beginners make.

Someone who already has a good reputation in the market, or is selling a unique and quality product, could have gross sales much higher than this, even in the first year. Also, if one has extensive marketing experience (or hires one who does), the numbers could be quite different too.