7 Tips to Setup your Home Business Budget

Every Home Business entrepreneur in the world has a clear and well defined goal: to earn money with his/her Business. Then the next question would be: how can we know if we really ?earn?or are just loosing money? Allthough it sounds trivial, it is not.

I assume that only in few cases a fellow home business entrepreneur will be able to have an own accountant to calculate the Profit/Loss sheet. So you may need to help yourself. Let?s go step by step. Setting an own Budget could help you to know ?when you are in plus?and when the opposite is the case.

A Budget is nothing else as estimating costs and income. As every ?prediction?, calculation and reality could differ. Thus it is your task to review your budget from time to time and adjust it based on real numbers. The ?real numbers?are the ?actuals?you get from your business. The ?budget?is the estimation of your costs and income. There are several applications on the market to perform the mentioned steps. For the beginning, you can use a calculation sheet.

1) Choose the periodicity of your budget. Usually you may choose weeks or months. This means you need to calculate every cost to a weekly or monthly basis. I.e. if you pay for your autoresponder 120$ a year, the monthly costs are 10$ and the weekly costs are equal 120$ divided by 52, getting 2,31$ per month

2) Make a complete list of all recurring costs you already know: i.e. Web hosting, Residual Income Fees, your autoresponder, lead subscriptions and so on. Make a complete list with all costs you already know. Consult your credit card statements and search your Paypal account for subscription payments. Transform the costs to the unity of time you have chosen in step 1 (i.e. monthly or weekly).

3) Now make a list of all ?one time?payments you plan to have this year, and calculate the accruals for the periodicity you have chosen in Step 1. Example: you plan to buy Internet Marketing Literature for 300$ this year (this is your Budget). You could calculate then a monthly ?costs?of this literature as 25$ a month, or 5.79$ per week. If you have purchased equipment (i.e. Hardware), you need to distribute the costs amount the life of the product. I.e. one PC usually is used for three years. If you pay 1000$ as one time payment, you can distribute the costs over three years, giving 333.33$ per year or 27.7$ monthly, or 6.41 $ per week. This is call ?depreciation.?. If you now that after three years you may sell the PC for 200$, calculate the depreciation accordingly, starting now from 800$ (1000$-200$). As you see, Hardware is not as expensive as you would expect, from the financial point of view.

Add the costs obtained in step 3) to the list you have already prepared in step 2). Now you have the complete list of your estimated monthly or weekly costs.

4) Now we come to the most interesting section: your Earnings! Obviously you can be in ?plus?, only if your earnings are higher as your costs. This sounds again trivial, but is not easy to achieve.

Most of the Internet Marketing Newbie?s would expect to be ?in plus? after a very short period of time. This is unrealistic. As you have seen in the first steps of the calculation of your budget, you may consider Hardware, Literature, Marketing spending and other costs that in the first months do not have the corresponding earnings. Thus, it is absolutely normal that you may have a period where you are ?in minus? for a while, till you reach your ?break-even point? (earnings = costs).

But let?s come back to the earnings. In Internet Marketing, your earnings are derived from sales. There are either direct sales or indirect sales from your downline, if you are driving an MLM like business.

Here you will see that the estimations of earnings is obviously much difficult then the estimation of your costs. Ideally, you may express your earnings as a percentage of your marketing spending. If your marketing effort is not able to produce sales, you may review it and look for other marketing strategies. You need to achieve that every penny invested in marketing lead to internet income. IF you have tracked properly your marketing campaigns, you may be in a good position to estimate your ?conversion rate? (the percentage of your clicks that lead to sales) and thus, can express your earnings as a percentage of your marketing costs.

Example: you are running a Campaign with PPC Search Engines to promote your business. You pay 0.05$ per click and achieve 300 clicks a month. Your corresponding recurring costs of 15$ a month are already considered in your budget.
Your conversion rate may be 1%, so you expect three sales per month. If you get 8$ per sale, your monthly earnings are 24$ a month. This means your profitability is 25% (24$-15$) / 15$. For every advertising dollar you get 1.25$ sales.

The total profitability of your business will be lower, since you need to consider the total cost and not only the PPC marketing cost.

The problem may consist that at the beginning you will not know the conversion rate of your campaign, so you will need to work with estimations. Once you have the real numbers, review your estimations based on that numbers. Your Budget will get more and more accurate, the more data you can provide.

5) Now you can build your Budget based on Costs and estimated earnings month by month.

You may decide to ?reinvest? part of your earnings and increase your marketing spending month by month.

It is time now to put all data into your Calculation Sheet. Start building columns, one column per period (week or month). Per each period, reserve two columns, one for your budget and one for your ?actuals? (your real numbers).

Divide your rows in ?Earnings? and ?Costs?, subdivide them in several rows for your earnings (in the case you are working with multiple programs, reserve one row per program) and one row per each cost element identified in the steps 1-2.

Reserve a Row for a sum of all your cost elements (per period) and a corresponding row for the sum of all your earnings (per period). At the end, add one Row with the difference of your earnings minus your costs.

Now you are in the position to see period by period, what is the ?net result? of your business. You will see immediately if you are earning or losing money.

As already mentioned, it is absolutely normal that in your first months (or years?) you will have more costs then earnings. This is the case for every business. However you should be now in the position to ?predict? when your ?break-even? point will be reached (total earnings = total costs, per period). You may decide to invest more in marketing activities if they seem to be profitable, or save costs by reducing your recurring expenses.

6) Review your budget on a regular basis. The more data you have, the more accurate your budget will get. Calculate period by period your conversion rate and monitor the results of your marketing activities. Put the results back to your budget and create new Budget ?versions? for that purpose.

7) Now run your business! Your Budget is now a powerful instrument to give you a good financial basis if you are on track or not. Some people have the tendency to oversee spending and overestimate earnings. If you feed your budget with real data, it will give you an instant view of the results of your entrepreneurship! Most of the CEO´s of the world are doing exactly that. Of course financial aspects are important, but can not replace your Vision and Strategic thinking. But it can ?bring you back to the earth?, if your strategy and vision is too ambitious, but can not be financed.