How to create a business budget for your small business?
6 Steps To Manage Income, Expenses
Creating a business budget is a crucial step toward success. As a new small business owner, there are many things you need to understand, How to create a business budget for your small business.
One of them is knowing how to create a business budget, and that can be daunting, especially when you’re just starting out. How knowing where to find the right financial information; not to mention learn corporate finance terminology and put all that data in the right order?
All of this may be enough to scare some people off from starting a business in the first place. A study reveals that most small business owners don’t even have a budget to get started. But the process of creating a business budget is not that difficult if you follow it correctly. Everything can be broken down into six steps.
Many people think that the budget is the least popular part of running a business; but if you want to be successful, creating and maintaining an adequate business budget will be a key part of that success.
Here is a step-by-step guide on how to create a business budget.
How to Create a Business Budget: Why Do It in the First Place?
Budgeting for your business is all about making an educated guess of what your business’s future finances will look like. This requires looking at what happened in the past month; what happened three months ago and what it looked like this month last year; then using that information to make sound financial decisions for the months and years to come.
If you’ve had a tough few months and expect you’ll be facing some equally bad ones; you can be prepared to minimize expenses wherever possible. If the business is booming and the video you posted has gone viral and is attracting customers; risk more and invest in buying more ad space to delight incoming customers and keep them coming back.
In other words, you don’t need a crystal ball to run a business; you need to learn, How to Create a Business Budget for your small business. And it takes some insight and educated guesswork to make sure everything keeps running smoothly.
Why do you need a business budget?
When starting your business, creating a budget is one of those things that can be left out. If your business is generating significant profits or experiencing a boom, it may not seem important to create a business budget.
But a budget can help ensure the long-term success of your business. A budget helps you see the next week and the month after next year, or even the next five years. Specifically, a business budget can help your business in a number of ways:
- Make the company more efficient,
- Allows you to indicate the remaining funds that you can reinvest,
- Predict slow months and avoid debts,
- Estimate what it will take to become profitable,
- Offer a window into the future,
- It helps you stay in control of the business.
Creating a business budget will make running your business easier and more efficient. A business budget can also help you make sure you’re spending money in the right places at the right time so you don’t get into debt.
How to Create a Business Budget for your small business: The 6-Step Guide
At first, you’ll notice that the business budgeting process begins with a review of your past income and expenses. The longer you have been in business, the easier this process will be; because you’ll have more data to look at as you move on to building your budget estimate.
If your business is brand new, however; you may need to do more research on typical costs for your industry or region; this allows you to gather working estimates for your projected finances. A business budget template can also help you get organized.
1. Check your income
The first step in any budgeting exercise is to look at your existing business and find all of your income. Add up all these sources of income to find out how much money is coming into your business on a monthly basis.
When finding your income, be sure to calculate your income, not your profits. Your income is all the money that comes into the business before expenses are deducted. Profit is what remains after deducting expenses.
Once you have identified all your sources of income, calculate your monthly income. It is important to do this for several months; and preferably for at least the previous 12 months, as long as you have that much data.
With 12 months (or more) of information, you can look at how your monthly income has changed over time and look for seasonal trends. Your business could collapse after the holidays, for example, or during the cold winter months. Knowing about these seasonal changes will allow you to prepare in advance for the leaner months and give you a financial cushion.
2. Subtract Fixed Costs
The second step in creating a business budget is to add up all the fixed costs. Fixed costs apply to all costs that are necessary on a recurring basis to run your business. Fixed costs can occur daily, weekly, monthly, or even annually; so be sure to get as much data as possible.
Here are some examples of fixed costs within a company:
- Debt Repayment,
- paid book,
- Depreciation of assets,
Your small business is unique and will have fixed costs other than those described here. Take a few minutes to write down other fixed costs that may be associated with your business. Once you have identified the fixed costs of your business, you subtract them from your revenue and move on to the next step.
3. Determine variable expenses
When looking for the data you need to list your fixed costs; you may also have noticed that there are variable expenses within your business as well.
Variable expenses are those that change based on your use of the service. Many of them are necessary to keep your business running, such as utilities.
You will also find expenses that are not necessary to run your business; but that would be nice to have, like education or extras that can increase profitability. This is called “discretionary spending”, which you can also transfer to your variable spending fund.
Here are some examples of variable expenses :
- The owner’s salary
- Replacement of old equipment,
- Office supplies,
- Professional Development,
- marketing costs,
During lean months, you will need to reduce your company’s variable expenses, starting with discretionary expenses. However, during profitable months when there is additional income; you can increase your spending on variable expenses for the long-term benefit of your business.
4. Set aside an emergency fund for unexpected expenses
Whether or not you’ve ever run a business, we all know that one-time costs don’t come at the right time. These costs arise when you least expect them and usually when the budget is tight. Prevent fear of unexpected costs when budgeting for your business; and this, while making sure you have extra money on hand and planning for contingencies in your budget.
Although you may be tempted to spend any excess income on variable expenses; set aside some in an emergency fund. This way, you’ll be prepared when equipment breaks down and needs to be replaced; or when you need to quickly replace flood-damaged inventory. Of course, there is always the option of a small business loan.
We hope for every entrepreneur that the following maxim is true: if your budget for a problem, an emergency never arises. What if an emergency arises? Well, you budgeted for it. So it’s not really an emergency, is it?
5. Create your profit and loss account
Once you have gathered all the above information; it’s time to put them together to create your profit and loss account.
Just talking about profits and losses can cause feelings of anxiety – we understand that. But remember, you have already done all the work. And it’s an addition and a subtraction: add up all your income for the month and add up all your expenses for the month. Then subtract the expenses from the income and hope to get a positive number at the end.
If you do, you have made a profit! Otherwise, it’s a loss and that’s good too. Small businesses aren’t profitable every month, let alone every year. This is especially true when you’re just starting out as a business.
6. Describe your prospective business budget
Whether you are a new business or have been doing it for a while; predicting what will happen to your business in the future is an educated guess. If you’ve been in business for a while, that will certainly help to make those assumptions more accurate (as you might guess).
Now that you have created your income statement, which is a historical record that shows the past of your business; it’s time to create your budget. And it’s a forward-looking, forward-looking document.
For this step, referencing your profit and loss meter will help you better understand the seasonal ups and downs of your business; what investments in your business are worth repeating, and what you should avoid in the future.
On your income statement, you should look for these trends:
- Large purchases of supplies or equipment that create a loss,
- Seasonal trends due to adverse weather conditions, natural disasters, or economic turbulence,
- Seasonal trend due to school calendars, tourist routes, or supply limitations,
- Profit higher than in previous years or not explainable.
When you review your profit and loss account, you look for ways to explain fluctuations and changes in your business.
For example, if you operate an ice cream stand; you’ll make a bigger profit in the summer when the temperatures are warm and the kids are out of school. Knowing your most profitable months will help you predict what your next year will look like. You can also take this information and decide to hire more staff and extend working hours at certain times of the year; which will make your business even more profitable during the months when demand is highest.
Make your budget efficient
Most entrepreneurs still struggle with creating a business budget. So how do you make your budget efficient so you can get back to the best aspects of business ownership? Easy.
Invest in accounting software to track income and expenses and automatically create your profit and loss statements. Hire an accountant you trust to help you manage your budget; to correct the course when the company goes astray and to ensure that you pay the necessary taxes.
Set up budgeting procedures that help you know where to find the numbers you need; when expenses are incurred and where the money you need is.
There are very few entrepreneurs you will meet who like budgets, finances, and spreadsheets. It’s not just the reason people become business owners. But budgeting is part of life when you’re a business owner. So, knowing step-by-step how to create a business budget and manage it effectively will make your job as an entrepreneur a little easier. For more reference please check this page. And read the personal finance quick start guide HERE