Preparing A Budget

Preparing a Budget

Preparing a budget in your business is one of the easiest tools available to CEO’s. By having a budget you can review how much you spent last year or quarter, and predict what you will spend this year or quarter. As implied, a budget can be made by year, month, quarter, or for any time interval that you deem relevant. There are two types of ways to make a budget, both giving you similar, but different results. The first is through Absorption Costing. The formula for this is:

Sale – Cost of Goods Sold = Gross Margin
Gross Margin – Selling and Administrative Expenses = Net Operating Income.

This may look easy enough, but there are a few things that are unique about this formula that need to be addressed. In Absorption Costing both Variable and Fixed Manufacturing cost are considered to be product cost, or in other words they are dependent on how many products you sell, not produce. Because of this you need to add both Variable and Fixed manufacturing cost together then divided that number (also known as the Cost of Goods Sold) by the total number of units produced to give you the total cost of production per unit. Then multiply that number by the actual number of units sold. This will give you the cost of everything you sold. The difference between what you produced and what you sold (or the leftovers) will be put into an inventory account for next period. This will give you the Net Operating Income of your company; however this will overstate how much you earned in that time period. It does this because it considers Fixed Manufacturing cost to be elastic, which it isn’t. It is not as accurate, but it is used for external purposed to give the illusion that more money was made that actually was. This is not illegal; however it is not as accurate.

For internal purposed accountants use Variable Costing. The formula for Variable Costing is:

Sales – Variable Cost = Contribution Margin
Contribution Margin – Fixed Expense = Net Operation Income

Like Absorption Costing this looks easy, but has a few tricks to it. First we need to explain the new variables. Variable Cost is a combination of Variable Manufacturing Cost and Variable Selling and Administrative Expenses. Fixed Expenses are a combination of Fixed Manufacturing Cost and Fixed Selling and Administrative Expenses. In Variable Cost only the Variable Manufacturing expense is considered a production cost. So you must divide it by the number of units produced to give you the cost per unit, then multiply by total units sold. Once you have that number, add it to the Variable Selling and Administrative expenses and the rest is how it seems. This type of budgeting gives you a more accurate Operating Income. It is used for internal purposes because it shows potential vulnerabilities in the company that you wouldn’t want competitors to know.

These are just a few examples of budgeting, however using this can be of great advantage to your company. You can plan you allocation of monies better so that you aren’t wasting money and resources. It can help you to prove your stability if trying to obtain a loan, or countless other reasons. Overall a budget is and easy and affective tool for you.

Contractual Law in your Business

The wonderful part of being an American is that you can choose what you want to be, where you want to go, and how you make your money. The American economy is set up in such a way that any person with a good idea can improve their circumstances and become the next “big thing.”

When starting a business sometimes in is necessary to induce the help of others, also known as a business partners. Anyone who reads the new will know that our world is full of business partnerships that go south because of misconduct or breach of contract. This type of action can be very harmful to both parties; however in the event that it does occur, here are a few things you should know that might help you protect yourself.

Contracts:

A contract is a special agreement between two parties. In order for something to be a legally binding contract it must consist of five elements.
1. Agreement
a. The two parties involved must have a specific agreement on something.
2. Consideration
a. The promise (or agreement) must be supported by a bargained-for consideration that is legally sufficient.
3. Elements of Contract
4. Lawful object
a. Can’t be a contract to do something illegal
5. Contractual Capacity
a. Neither of the party members can be either drunk, insane, or a minor.

Contracts do not necessarily have to be signed in order to be legal and binding. Some contracts can be made void by the Clause of Mistake.

Clause of Mistake:

This means that during the negotiating of a contract if false information is given on either side there could be means enough to void the contract. There are two types of mistake. The first is unilateral mistake, and the second is mutual mistake.
- Mutual mistake is when both parties enter into a contract under false pretenses
- Unilateral mistake is when only one person has the false pretense of a contract.
Clause of mistake can void a contract, however if not handled correctly it can do more harm than good.

Misrepresentation:

Misrepresentation is where one party enters into a contract purposefully under false representation. Misrepresentation is characterized by these four principles.

1. The wrongdoer made a false representation of material fact.
2. The wrongdoer intended to deceive the innocent party.
3. The innocent party justifiably relied on the misrepresentation.
4. The innocent party was injured.

If any of these things occur in your contract with another you may be entitled to a voided contract. If you contract is void and you decided to sue you are entitled to certain damages. There are three types of damages.
o Compensatory
Award damage as if contract hadn’t been broken
o Consequential (foreseeable)
damages you can estimate
o Punitive (punishment)
Damaged amount for outright lying to the person and contracting under false pretenses

Who to hire...

Every company needs employees and although you as the owner can go and search for the specific employees you want, that could become time costly and prove to not be as useful as you would think. This is why employers will put job postings in papers and on websites, so that those candidates seeking employment will come to them. (The price of a listing being considerably less expensive than employee searching). As you are looking for employees there are a few key things that you can look for to make sure that you will choose the best person for the job.

Each company will have its requirements for a job for which it is hiring. These being the case, keep these requirements in mind as you read through resumes and do interviews. Now, nothing is more annoying than having to interview a person who is obviously not what you are looking for. To prevent this all you need to do is screen through your resumes and your final interviews will be very positive.
First, you listed in your posting of the job the requirements the person needs to have. Likewise your focus should be on those key points. If a good majority of those requirements do not appear within the first half of the resume then I would stop right there and give it no further attention. Even if the person has the necessary skills they failed to present them within the first chunk of their resume. This shows very bad organizational skills and poor attention to detail. (attributes of a person you don’t want working for you). So know what you want and if the person is not trying to convince you from the start that they are what you want then drop them.

Second, keep a list of attribute that you want the candidate to have that were not listed in the posting. These could be things along the lines of personal attributes, golf skills, family, service, etc. You will not list these because these are things you want the candidate to show they have, without knowing they have to show them. This is a large test of character for the person you are hiring. You can tell more about a person through their resume by reading between the lines than actually reading the words.

Third and finally wait to hear back from them. If your candidate is serious enough about getting this job then they will be active about obtaining it until it is filled. These shows great dedication and follow through, attributes that will also show through in their daily work. Wait for a follow up email, phone call, or thank you letter. The candidate that does that will has a higher likelihood to be searching for a career and not just a job.

As you exercise these simple steps in searching to fill a new position you can be guaranteed that your candidates will be better workers. They will be more serious about what they do and you will have fewer problems with them.