Building the Holiday Budget Expense Category Step-By-Step.
A hard look at the [added expenses].
Do you pay attention to the earnings report of a major corporation as soon as they are made public? The corporation must create, and stick too, the monthly budget because even the smallest changes in costs will make or break the earnings report. Here’s the rub for the small business owner; in our business, the same percentage change in costs can mean the difference in remaining open next month or closing up shop. The Holiday Budget is a prime time of the year for major changes in business expenses.
What do we mean by Added Expenses?
The added expenses of the Holiday Budget are expenses that support increases in holiday income and holiday-related events. We need to consider the types of costs created by an increase in sales and orders. An example would be the cost of marketing for holiday promotions and the staff required to process the extra orders. Also, business owners get excited about offering a company Christmas party to their employees so they can be praised for their hard work. Now, what about the owner’s take-home pay? Our businesses are created to support our personal lives so we need to ensure that our Holiday Budgeting efforts allow for an increase in at-home spending.
Why the [added expenses] are important?
Just like any major corporation we have to end the period with enough cash to pay our bills and continue operations. If you overspend in the holidays without knowing if you will make enough money then you are looking at bankruptcy. The budget is crucial to the life of a small business, and any added expenses that might or might not occur will make or break the budget in any given month. That is why we must take such a hard look at the expenses that are inevitably going to arise this holiday season.
5 Critical [added expenses] of the Holiday Budget?
1. Cost of Sales, Operational Costs, and Overhead
If we are going to successfully fulfill more orders this holiday season then we have to take into consideration the costs associated with marketing. Additionally, we have to ask ourselves if we have the cash available to purchase the inventory needed for additional sales. So, let’s take a look at the rundown:
- Cost of Goods Sold: in theory, this is a simple calculation. We multiply the expected units that will sell by the cost of the wholesale price. So, spend a moment forecasting your sales for the period you are budgeting. Perfect, now add that cost of inventory to your typical budget and you have a more accurate COGS for the holiday period.
- Processing, shipping & handling: this can be a little dicier unless you have spent time ratcheting down the processing and shipping costs per unit. We have to consider bulk ordering pricing deals, increases in supplier pricing due to seasonal demand, etc. Once you determine the increased costs for this expense category then you can add it to your Holiday Budget.
- Employee salaries: Increased orders, packing and shipping, and customer service means added employee hours. My advice for a calculation is to divide regular-season total salaries by regular-season total revenue. This will give you a percentage of employee salaries based on revenue. Now, simply multiply this percentage by the expected revenue and it will give you an expected cost of employee salary for the Holiday Budget.
- Other Overhead Items: this is the cost we must consider for all other expenses that are not mentioned here. These are expenses like utilities and general office supplies, administration costs and meals, or other small items like employee snacks. If you expect to be able to fulfill all extra orders for the season within the confines of your regular operating hours then these costs will not be materially affected. Add any additional expectations to your Holiday Budget.
2. Holiday Events and Parties:
Now to the fun stuff. Spending money on your employees is a great way to increase employee morale by taking time to focus on their achievements and contributions to the success of your company. We need to appropriately budget for events that are reasonable and pragmatic to the size of our company and net income. After determining the costs of your events you need to realize that this will likely be the category that gets cut if your budget is turning out negative. Turn to Pinterest, and the help of family, to plan a budget-friendly party that we can all enjoy. Yes, I would like to be invited since I helped you with the budget.
3. Employee Gifts:
I would not be a good tax advisor if I didn’t let you know that a company can only deduct gift expenses up to $25 per employee, annually. This helps us to put a marker on what we can afford or not afford. If a business owner wants to spend more than this on their employees that is a great thing, however, it must fit within the budget and it cannot be deducted from the taxable income.
4. Tax Liability:
since we are discussing tax deductions then we need to discuss the liability due because of the increase in net income. If you plan on making more in revenues then you need to plan on the taxes due on those revenues. A tax projection can be the most important consultation your business receives for the year. Refer to my prior blog, “What Is A Tax Liability Projection?”. Also, ask your tax preparer about estimated payments. These are payments the IRS requires of business to make each quarter to keep up with their projected tax liability.
5. Owner’s Take Home Pay
I hope that your company is now providing enough income for a paycheck at the end of the month. Now, we all realize that many sole proprietors simply transfer money in and out of their checking account when they need it. However, I am going to propose that you wait until the end of the month and write a check for the proper amount of remaining revenue that your household requires. This type of budgeting will allow for growth in the business while ensuring that you have only taken what is available from the business. The outcomes we must avoid here are overdrawing the account and leaving business payables unpaid. So, how much does your household typically need to operate the 4 walls: shelter, water and lights, food, and clothing. Now, we simply decide how much we will spend on holiday events and gifts before making those purchases. I know this sounds extremely limiting to those whose love language is giving gifts, but it is necessary that gift-giving come after the priority of the 4 walls and maintaining the business. Once you have decided these numbers then add them to your Holiday Budget’s monthly take-home pay.
Keeping it all in perspective
Now that you have calculated the expense categories for 5 major Holiday Budget expenses we need to tally up the budget and see what is leftover. If you have projected income left over then you can put that into one of the expense categories. My suggestion would be to send it to the Owner’s take-home pay and pay off bills first, then build the emergency fund up before finally starting to save for retirement. If your final budgeted income is now negative then we need to decide which costs to reduce so that we do not run out of money. Remember, the first expense to reduce is the holiday event. Pinterest will give you some great ideas for holiday events on a budget.
What is next?
Determining the income, that is what’s next. We need to take a good hard look at our projected income for the holiday season. This category can be wildly affected by many variables for both service-based businesses and retail-based businesses. We will then move forward with the specifics of building a Holiday Budget for the business and the home, right after income. Do not hesitate to post comments or questions, tips, and tricks for the community, or just say hello. And as always, sign up for next week’s blog post.