How to create a small business budget
A business budget predicts how much money you will make and spend in the future. It helps you see if you are meeting your financial goals for the month, quarter, or year. A business budget shows how much money you will earn and spend. It helps you track your financial goals monthly, quarterly, or yearly. Your budget is a guide to compare your actual spending with your planned budget.
You can use this information to make smart business choices. For instance, if you see that you are spending too much money, you might decide to delay buying new equipment.
Here’s a step-by-step guide for creating a business budget, along with why budgets are crucial to running a successful business.
How does a business budget work?
Budgeting uses past numbers to help plan for the future and make smart decisions now. If you had slow months and expect more, you can cut costs. If business is good and you have more customers, you might buy more inventory. Making a business budget can be boring, but tools like accounting software can help. It has your financial data and budgeting reports.
The software then calculates numbers like gross profit, net operating income, and net income for you.
You can compare actual numbers with expected numbers using a Budget vs. Actuals report. Some businesses use business budgeting software and accounting software for advanced features like cash flow forecasting and projection methods.
Why is a business budget important?
A business budget helps you plan for the future. It looks ahead to next year or even the next five years, not just next week or month.
Creating a budget can help your business do the following:
- Maximize efficiency.
- Establish a financial plan that helps your business reach its goals.
- Point out leftover funds that you can reinvest.
- Predict slow months and keep you out of debt.
- Estimate what it will take to become profitable.
- Provide a window into the future so you can prepare accordingly.
Creating a business budget will make operating your business easier and more efficient. A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt.
How to create a business budget in 6 steps
The more time you have been in business, the more information you will have to plan your future budget. If you have just started a business, it is important to research the usual costs for businesses in your industry. This will help you estimate your income and expenses accurately.
From there, here’s how to put together your business budget:
1. Examine your revenue
To start budgeting, first identify all the ways your business makes money. Add up all the income sources to see how much money your business brings in each month. It's best to do this for several months, ideally the past year if you have the data.
Pay attention to how your business's monthly income fluctuates and watch for patterns that occur seasonally. For instance, your business may see a decrease in sales after the holidays or during the summer. Monitor your business's monthly income fluctuations and look for seasonal patterns. For example, sales may drop after the holidays or in the summer. Understanding these trends will help you prepare for slower months and save money for when business is slow.
Use past numbers and trends to predict future revenue, not profit. Revenue is sales money before expenses, while profit is what's left after expenses.
2. Subtract fixed costs
To make a business budget, first add up all your past fixed costs. These costs stay the same regardless of your income. Use this data to predict future fixed costs. They can be daily, weekly, monthly, or yearly. Gather as much information as possible to make accurate predictions.
Examples of fixed costs within your business might include:
- Rent.
- Debt repayment.
- Employee salaries.
- Depreciation of assets.
- Property taxes.
- Insurance.
After finding your business's fixed costs, subtract them from your income and proceed to the next step in the process.
3. Subtract variable expenses
When you list your fixed costs, you may see other expenses that vary. Variable costs go up or down based on how much your business produces. Check how these costs have changed in the past to predict future variable expenses. Subtract these costs from your income as well.
Some examples of variable expenses are:
- Hourly employee wages.
- Owner’s salary (if it fluctuates with profit).
- Raw materials.
- Utility costs that change depending on business activity.
In slow times, cut costs. In good times, spend more on things that help your business grow.
4. Set aside a contingency fund for unexpected costs
When you’re creating a business budget, make sure you put aside extra cash and plan for contingencies.
Instead of spending extra money on random things, it's better to save for emergencies. This will help you be prepared for unexpected costs like fixing broken equipment or replacing damaged inventory quickly.
5. Determine your profit
Add up all the money you expect to make and spend each month. Then, take away your expenses from your revenue. This number is also called net income. If the number is positive, you will make a profit. If it's negative, you will have a loss, which is okay for small businesses.
Not all businesses make a profit every month or year, especially when they are new. Compare your expected profits to past profits to see if they are realistic.
6. Finalize your business budget
Are you earning enough money or spending too much in your business? Set achievable goals for how much you want to spend and earn each month, quarter, and year. If your goals are not meeting your expectations, create a plan to make up the shortfall.
Regularly compare your actual numbers to your budget to see if your business is meeting goals. Make changes if needed.
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