Create a Small Business Budget in 5 Simple Steps
Running a business means overseeing various tasks like sales, marketing, purchasing, and customer relations.
Then, there is the ever-essential aspect of finances. Poor handling of your finances will lead to business collapse.
Using a budget is the best way to oversee your finances from day one. A well-thought-out and followed budget will help you grow your business to newer heights. So, what is a budget, and how do you create one?
This article will define a budget and provide five tips on creating a workable budget.
- What’s a Business Budget?
- Step 1: Know your Business’s Total Income
- Step 2: Calculate Your Fixed Costs
- Step 3: Calculate Your Variable Expenses
- Step 4: Figure Your One-Time Spends
- Step 5: Summarize your Finances
- Leverage your Budget for a Healthy Financial Life
What is a Business Budget?
A budget is an estimation of how much you’ll earn and how much you’ll spend in a certain period. It details specific areas of expenditure and income to help you make sound financial decisions. Your budget also incorporates your long-term financial goals and is the first thing you should get right.
So why is a business budget so important?
A business budget will help you:
- Follow a preset road map. Your business budget is the route you intend for your business. It aids you in determining your progress and gives insight into how to attain your goals.
- Track your spending. Spend management allows your procurement personnel to buy what you included in the plan. It helps you stay within your financial limits and avoid unnecessary purchases.
- Find sources of income. A business budget will show you areas of unnecessary expenditure and unearth places where you can earn extra. As a result, your profits go higher.
- Get business funding. If you plan on getting your business funded, a budget will help you big time. Most investors and lenders/credit providers will need to see your budget, which shows how you earn and spend.
Since we have established the benefits you will get from a budget, let’s look at how to create one.
Step 1: Know your Business’s Total Income
You can’t build a small business budget without your financial status. First, you need to know how much you are making and the source of the money- the first place to check your income in looking at your sales numbers. Then you can look at other places where you make money.
Your income sources will vary depending on your business. As an engineering startup, your source of income could include the following:
- Sales from hardware parts
- Sales from finished products
- Consultation for other smaller startups
- Money from repair and maintenance
You must ensure you have captured all sources to get a clearer picture of your income.
Step 2: Calculate Your Fixed Costs
The next thing after determining your income is knowing where you spend the money. The best to start is to figure out your business’s fixed costs.
Fixed costs are the expenses that recur month after month. It means that you know that you’ll pay them monthly. They can include rent, payroll expenses, and other utilities.
You can also put annual expenditures under fixed costs, such as subscriptions for workplace software, licensing and permit fees, as well as rental equipment expenses. Additionally, various business insurances could also be considered yearly fixed expenses that you should look out for.
Business insurance may include personal and employee liability coverage, accident insurance, tools and equipment insurance, key man insurance (check out what is key man insurance here), and more. These extra costs could be necessary to protect your company from asset damage, and in some cases, from lawsuits as well.
If you are starting out, try and forecast the costs by listing down major monthly and annual requirements.
Step 3: Calculate Your Variable Expenses
Your variable costs are the expenses that change in line with business operations. They are recurring, but the amount changes from month to month. This can include utilities(electricity, water, and phone bills), transportation costs, and sales commissions.
The fluctuation in variable expenses means that they can affect your profits. The higher the variable expenses, the lower the profits. However, when profits go low, you can cut down on variable costs; when they are high, you can spend more to improve business.
Step 4: Figure Your One-Time Spends
Not all your expenses are recurring. You’ll sometimes need to spend on things that happen once in a long time. You can’t risk forgetting about them.
Your one-time spending includes office furniture, machinery, and training camps. If you know you’ll make such purchases, you must include them in your budget. This way, you’ll set aside the required amount to facilitate the expenditure and avoid using cash for other purposes.
You can also set aside an emergency fund for unexpected events that need you to spend. Let’s say your electricity stops working, or your office elevator malfunctions, you would need to call upon an electrician or quality elevator services to get that fixed as soon as possible. As a business, you should not be out of funds to provide for these essential repairs. Moreover, you must be prepared for any unexpected bills like consultation, and unplanned purchases.
Step 5: Summarize your Finances
If you are looking for a way to summarize your finances, you might want to consider using business budgeting software. This software can help you keep track of expenses, track income, and generate financial reports.
After getting clear figures on your expenses and income, you need to make the numbers make sense. The numbers need to show your financial health at that period.
You’ll want to make a comparison between your total income and total expenses. Add the expenses(fixed expenditure, variable costs, and one-time spend) and then subtract the amount from your total income. A positive figure shows profit while a negative one shows a loss.
In the case of losses, you’ll need to reduce your expenditure and look for newer sources of income. On the other hand, if you are making profits, you can consider saving the surplus or investing in a different portfolio.
Leverage your Budget for a Healthy Financial Life
Having a budget may seem tiresome, tiresome, and non-essential, but it’s worth it. Business budgeting helps you manage your finances to grow sustainably. So, ensure you know what a budget entails and how to create it.
Riley Scott is an experienced writer in business, personal finance, supply chain, and
procurement. He has a keen understanding of the inner workings of businesses and is able to
communicate financial concepts in a way that is easy for everyone to understand.
Click here if you would like to read more of his articles.