An Overview Of How To Create A Business Budget For Your Small Business
As a new small business owner, you must learn many things that you have never done before.
One of them is figuring out how to make a company budget, which may be frightening, especially if you're just starting out. How do you know where to go for the proper financial information, let alone master the company’s finance jargon and put all that data together in the right order?
All of this might be enough to deter some people from establishing a business in the first place. According to one survey, most small business owners don't even have a budget, to begin with.
However, if you approach it correctly, the process of creating a company budget isn't all that tough. One can break everything down into six steps.
Why Do It In The First Place?
Budgeting for your business is making an informed bet about how your company's finances will look like in the future.
It involves looking at what happened last month, three months ago, and this month last year, and then using that information to make prudent financial decisions for the months and years ahead.
If a company is growing and the video you released went viral, bringing in customers, take a chance and invest in purchasing additional goods to please those new customers and to make sure they keep coming back.
Putting it another way: you don't need a crystal ball to operate a business, but you do need to know how to construct a business budget.
And it does require some intuition and smart guesses to keep everything running well.
Why Do You Need A Business Budget?
When you're just starting, making a budget is one of those tasks that may easily fall by the wayside.
If your company is making a lot of money or is experiencing a boom, it may not seem necessary to develop a business budget.
On the other hand, a budget can help assure your company's long-term prosperity. A budget allows you to see beyond the next week and month and into the next year, or perhaps the following five years.
Making a business budget will make running your company easier and more efficient. A company budget may also help you keep out of debt by ensuring that you spend your money in the appropriate locations and at the right time.
How To Create A Business Budget: A Six-Step Guide
1. Examine Your Earnings
The first stage in any budgeting process is to examine your current business and identify all of your revenue streams.
Add together all of your income streams to determine how much money comes into your business monthly.
When calculating your income, make sure to account for revenue rather than profit. Your revenue is the total amount of money that enters the firm before expenditures are removed.
Profit is the amount of money left over after all expenditures have been eliminated.
Once you've identified all of your revenue sources, compute your monthly income, preferably for the preceding 12 months if you have that much data.
You may evaluate how your monthly income fluctuates over time and check for seasonal patterns using 12 months (or more) of data.
2. Subtract Fixed Costs
The second stage in developing a company budget is to total all your fixed expenses. Any expenditure required on a recurrent basis for the running of your firm is referred to as a fixed cost.
Fixed expenses might occur daily, weekly, monthly, or even yearly, so gather as much information as possible.
Your small business is unique, and your fixed expenses will differ from those outlined here. Take a few moments to develop a list of any additional fixed expenditures related to your company.
Once you've discovered your company's fixed costs, deduct them from your income.
3. Determine Your Variable Costs
While looking for the information you need to identify your fixed expenditures, you may have observed that your company has some variable charges as well.
Variable expenditures vary according to how often you utilize a service. Many of these, such as utilities, require your firm to remain operational.
You'll also discover costs here that aren't strictly required for the operation of your firm but would be good to have, such as schooling or extras that can boost profitability.
These are known as "discretionary costs," and you can also roll them into your variable expenses fund.
4. Make Reserve Money For Unforeseen Expenses
Whether you've operated a business previously or not, we've all learned that one-time expenses don't always occur when it's convenient.
These expenses appear when you least expect them and, more often than not, when your budget is short.
When budgeting for your business, avoid the worry of unexpected expenditures by keeping some extra cash on hand and planning for contingencies within your budget.
5. Make A Profit And Loss Statement
Once you've gathered all of the data mentioned above, it's time to compile it into your profit and loss statement – also known as a P&L sheet.
We understand that even discussing a profit and loss statement might cause anxiety. But keep in mind that you've already completed all of the jobs.
It's also addition and subtraction: total your monthly income and spending. Then, deduct the costs from the revenue and hope for a good result.
6. Outline Your Long-Term Business Budget
Forecasting what will happen to your business in the future is informed speculation, whether you're a new firm or have been doing it for a long time.
If you've been in the company for a while, your estimates will be more accurate. Now that you've established your profit and loss statement, which is a historical record that shows the history of your company, it's time to build your budget, and this is a text that looks to the future.
Referencing your P&L for this phase will help you better understand your firm's seasonal ups and downs, which investments in your business are worth repeating, and what you should avoid in the future.
How To Make A Business Budget: Making Budgeting Efficient
Invest in accounting software to automatically manage revenue and spending and generate P&L statements. There are several systems available, ranging from Quickbooks to Xero.
Hire a trustworthy accountant to assist you in managing your budget, correct course when your firm deviates off course, and ensure you pay all required taxes.
Divide the process of creating a company budget into simple phases – keeping a business budget is much easier when you complete bits of the job over time and handle a little bit each day or week.
Set up budgeting practices that will assist you in knowing where to go for the figures you need, when costs are paid, and where the money you need is located.