Running your own business presents unique opportunities for you to be your own boss, bring your entrepreneurial vision to life and direct your financial future.
Creating a business budget is an excellent first step for any new business owner. By taking a closer look at your assets, expenses and financial goals, you can craft a better plan for the future of your booming business. And ideally, you can reap some of the monetary benefits.
Let’s take a closer look at how to create a business budget and discuss the benefits of budgeting. You might even find some helpful business budget resources. With the right tools and processes, you can use business budgeting to your advantage.
- What is a business budget?
- Benefits of budgeting for your business
- Essential components of a good business budget
- How to create a business budget
- Specialised small business budgets
- Best practices for business budgeting
- Business budgeting with QuickBooks
A business budget is an outline of an organisation’s revenue, expenses and profit over a period of time—generally, monthly, quarterly or annually. A good business budget assigns a purpose to every dollar your business earns. For instance, some money might go towards bills or business growth. Other money will help fund daily operational expenses and take-home pay for yourself and your staff.
A solid business budget serves as a road map for spending and earning. It creates a lens into your organisation’s financial future and facilitates better decisions all around. Ready to get your business idea off the ground? You’ll need to consider startup costs. Wondering if you can or should purchase new equipment this year? Refer to your business budget.
Maybe you’re looking for ways to cut down on expenses. Your business budget can present a view of your financial health, including where you’re spending money and where you might benefit from cutting back. With better foresight, you can cultivate better business performance and improve earnings from the last quarter or the last year.
The benefits of budgeting may be obvious to some. But a recent study suggests that not all business owners are completely convinced, especially those who may have just started a new business. Many financial and business experts would classify this as a misstep, since your business budget is a financial road map to your spending.
Research suggests that business budgets offer the following benefits:
- They give business owners more freedom to run their organisations with confidence.
- They allow business owners to identify cash flow and spending problems.
- They empower business owners to have a greater sense of control and insight when dealing with financial challenges.
- They help business owners and decision-makers predict cash flow and identify trends.
- They demonstrate positive money management to lenders and investors.
- They give you the chance to identify and rectify problem areas quickly.
Bottom line: consider a detailed budget as one of your key business needs.
A business budget takes into account an organisation’s total revenue and expenses to reveal net profit (or loss). They include everyday revenue and expenses like:
- Average order amount
- Number of product orders per month
- Billable hours
- Average payroll costs
- Material expenses
- Rent, mortgage, and utilities
When building a business budget, business owners should bear in mind that output depends on input. Make sure you’re collecting accurate data points whenever you’re dealing with your business’s finances. A simple mathematical error or expense can lead to confusion or, worse, uninformed financial decisions.
Now you know what a business budget is, why it’s important and what the essential components of a good budget are. So let’s take a look at the steps you need to take to create one.
1. Calculate all forms of income
Whether you’re optimising your personal spending or building a business budget, your first step should be aggregating all of your forms of income. Your net income determines how much you can afford to spend. And it indicates your take-home pay and whether your business performance is growing or stagnating.
To find out how much money your business is bringing in, refer to your profit and loss statements. Depending on your business model, you may have several income sources, so be sure to include any revenue streams in this section.
2. Subtract your fixed costs (or fixed expenses)
Once you’ve added all of your business’s income together, you can subtract your fixed costs. Fixed costs are expenses that remain consistent throughout the year. Whether you pay bills monthly, weekly or annually, you can expect to spend a set amount of dollars on each expense. These costs are easy to predict, so they’re easy to work into your budget. The one-off expenses, or variable costs? Not so much—more on that in a minute.
Examples of fixed costs include:
- Commercial rent or mortgage
- Operational utilities
- Loan payments
- Insurance bills
- Employees’ salaries
Once you’ve tallied up your fixed expenses and costs, you can subtract that number from the total income you calculated in step one.
3. Subtract your variable expenses
In addition to your fixed costs, you might anticipate monthly operating expenses that may not always be the same amount. These variable expenses may be harder to predict, but you can refer to old receipts and invoices to estimate them.
Examples of variable expenses include:
- Material costs
- Billable staff wages (i.e. freelancers, outsourced work, etc.)
After identifying your variable expenses and estimating how much they cost each month, subtract the amount from your income.
4. Prepare for emergency and one-time expenses
Life is full of unexpected circumstances. As a business owner, you’re likely familiar with unexpected expenses. New equipment, hiring expenses and unplanned events can add up, so it’s wise to plan ahead as much as you can.
You can’t predict when you’ll need to pay for an emergency expense or how much it might cost, but you can set aside some cash to lessen the burden.
5. Create a profit and loss statement
You’ve accounted for your income and fixed, variable and emergency expenses. Now you can better understand your business finances by creating a profit and loss (P&L) statement. A P&L statement is a high-level overview that shows whether your organisation is profitable or in the red.
When you add up all of your income then subtract your total expenses, you should have a positive or negative number. A positive number indicates that you’re in the black and, therefore, making money. A negative number indicates that you’re burning a hole in your pocket.
Your P&L statement serves as a baseline for creating your business budget. You can access your profit and loss statement, track trends, monitor invoices and more from your QuickBooks account.
Keep in mind, your profit and loss statement may not always show you the results you want. But with better business budgeting and forward-thinking, you can set yourself up for a brighter and more profitable future.
6. Draft your business budget
After reviewing your P&L statement, you’ll have a better idea of where you’re spending your money—and if you’re spending responsibly. With this data in mind, you’re ready to draft your business budget for the next year, quarter or month. Most businesses opt for quarterly budgets.
A basic budget outlines your expenditure and designates limits for each expense over a given period. This outline can help you determine whether you’re earning and spending within your abilities. With online accounting software like QuickBooks, you can easily glean insight into spending patterns and assess where your business stands financially.
Every small business has a niche, workflow and financial goals, so it’s important to remember that there’s no one-size-fits-all approach to business budgeting. As you learn how to build a business budget and experiment with the strategies you’ve learned, consider the following:
- Seasonality may affect customer buying behaviour depending on your business type. Consider these fluctuations in profit and expenses as you plan your budget.
- If you run an e-commerce business, beware of hidden costs like shipping fees, website upgrades and point-of-sale expenses.
- Budgeting for startups can be especially challenging because they’re typically much more limited on data and performance history. But accurate accounting software and conservative estimates can help you improve your business budget year after year.
- If you run a service-based business, you’re working with more estimates than a product-focused business. Keep an eye on trends to make sure your budget has plenty of wiggle room.
A great business budget creates a clear connection between your day-to-day operations and financial resources. It can help you navigate tough business decisions and even help you identify areas for growth. But an effective budget doesn’t happen overnight. As you create and reflect on your business budget, keep these small business budget best practices in mind.
- One change in expenses or income trickles down to your budget. Hiring a new employee doesn’t just mean you’re adding another salary. It can also translate to changes in payroll taxes, benefits and other expenses. Anytime you adjust your business budget, consider other associated costs.
- Make sure that you’re budgeting for all expense categories, including fixed, variable and one-off expenses. Anticipating these costs can help you balance your business budget and plan ahead. Track your business expenses effortlessly and accurately using QuickBooks.
- View your business budget as a living document. Financial circumstances change, and the unexpected happens. Your business should always be prepared to weather the storm. Review your financial statements regularly, reconsider your costs and spending, and refine your business budget as necessary.
- Set goals but avoid wishful thinking. Use your bookkeeping records to determine what might transpire over the next month, quarter or year. But ultimately, it’s a better idea to be conservative with your budget than expect the best-case scenario.
- Look out for ways to cut costs and create growth. As a business owner, it’s up to you to position your business for greatness. Break down your finances into areas of success and improvement. Spotting opportunities to improve your business finances can make your organisation more profitable and sustainable in the long run.
Building a business budget can feel like an overwhelming process, but it’s an essential one if you want to have an edge on the competition, maintain financial stability and move your business forward.
You can use an Excel spreadsheet to create your business budget. Using accountings software like QuickBooks can take your business budget to the next level with features and tools that can help you manage your cash flow and run powerful financial reports so you have more information on your financial performance so you can make more informed business decisions. Explore our product features to learn more.