Estimating Your Operating Costs
Managing your consulting services business requires that you manage your business budget so you can continue to provide service, support, and employment to others as well as a profit to yourself. When you first start your business, you establish a preliminary budget. Now that your business is operating, you must establish an operating budget. The difference is that a preliminary budget is what you think your income and expenses will be; an operating budget is the actual income and expenses.
A budget is a forecast of all cash sources and cash expenditures. It most commonly covers a twelve-month period. At the end of the year, the projected income and expenses in the budget are compared to the actual performance as recorded in the financial statement.
A budget can greatly enhance your chances of success by helping you estimate future needs and plan profits, spending, and overall cash flow. A budget allows you to detect problems before they occur and to alter your plans to prevent those problems.
In business, budgets help you determine how much money you have and how you will use it. They will also help you decide whether you have enough money to achieve your financial goals. As part of your business plan, a budget can help convince a loan officer that you know your business and have anticipated its needs.
Not sure what your consulting business budget should look like? Ask your competitors. That is, use your membership in trade associations to discover what similar consultants have established for their operating budgets. Compare by size — for example, get expense percentages for consultants of approximately the same income level as yours. Ask your trade association for financial guidelines.
A budget will indicate the cash required for necessary labor and materials, the day-to-day operating costs, the revenue needed to support business operations, and expected profit. If your budget indicates that you need more revenue than you can earn, you can adjust your plans by:
Reducing expenditures (hiring independent contractors or part-time employees instead of full-time employees, purchasing less expensive furniture, eliminating an extra telephone line)
Expanding sales (offering additional services, conducting an aggressive marketing campaign, hiring a salesperson)
Lowering your salary or profit expectations
By gathering and managing data on your income and expenses you can better decide what actions you need to take to keep your consulting service profitable. You're the boss.
There are three main elements to a budget: sales revenue, total costs, and profit.
Consulting services often have higher variable costs than fixed costs. That is because, once overhead is paid, expenses like research and travel fluctuate with income. Smart consultants closely track variable expenses so they don't get out of hand and cut into profits.
Sales are the cornerstone of a budget. It is crucial to estimate anticipated sales as accurately as possible. Base estimates on actual past sales figures. Once you target sales, you can calculate the related expenses necessary to achieve your goals.
Total costs include fixed and variable costs. Estimating costs is complicated because you must identify which costs will change — and by how much — and which costs will remain unchanged as sales increase. You must also consider inflation and rising prices.
Variable costs are those that vary directly with sales. Paper and printer toner expenses are examples of variable costs for your consulting services business. Fixed costs are those that don't change regardless of sales volume. Rent is considered a fixed cost, as are salaries. Semi-variable costs, such as telephone expenses, have both variable and fixed components. Part of the expense is fixed (telephone line charges), and part is variable (long-distance charges).
The Bottom Line
Profit should be large enough to make a return on cash investment and your labor. Your investment is the money you put into the firm at start-up and the profit you have left in the firm (retained earnings) from prior years. If you can receive 10 percent interest on $25,000 by investing outside of your business, then you should expect a similar return when investing $25,000 in equipment and other assets within the business. In targeting profits, you also want to be sure you're receiving a fair return on your labor. Your weekly paycheck should reflect what you could be earning elsewhere as an employee.