A lack of effective budgeting can see your business squeezed for cash, causing stress and impacting your ability to turn a profit. Creating a solid budget is a strong investment in the future of your business because it enables you to track cash flow versus expenses and helps you asses how much revenue you need to keep growing.
Get your finances in order with these top tips for creating a smart, effective business budget.
Gather Your Data
Building a realistic budget depends on inputting accurate figures. Use your a balance sheet to look over past incomings (revenue) and outgoings (expenses) and input absolutely everything into your budget.
Also look for any patterns. Are there times when your business is normally flat out and are there predictably quiet times? Understanding your typical business cycle can help you ride out peaks and troughs more effectively.
Don’t forget to consult with your staff to determine a clearer picture of actual and projected costs. You staff may alert you to recurring or upcoming expenses you hadn’t considered.
Distinguish Between Fixed and Variable Expenses
Defining which expenses are fixed and which fluctuate from month to month can help give you a sharper overview of where you can potentially be more efficient and save your business money.
Fixed expenses include rent, insurance, debt repayments and salaries if you employ staff, while variable expenses include everything else. Some variable expenses can be controlled (the amount you spend on travel and entertainment, for example), while others can’t (such as the price of raw materials).
Don’t Forget to Pay Yourself
Paying yourself a wage is a vital business cost. After all, if you don’t have enough to pay your own bills or support your lifestyle, what are you working for? Include your own salary as a fixed business cost.
What Do the Numbers Mean?
Once you’ve tallied up the numbers, it’s time to crunch them. A simple formula looks like this: projected revenue – variable expenses – fixed expenses = projected net income.
This final calculation is all-important because it’s a solid estimate of your available cash over the course of the upcoming quarter or year. Looking at the figure, is it enough for you to achieve your business goals? If not, what can be done about it? Is there any margin to reduce variable expenses, or are there ways you could boost your revenue?
In essence, a business budget arms you with the information you need to make sage business decisions going forward. Even if your projected net income is lower than you’d like, try looking at this data as an opportunity to modify your operations for the better. On the other hand, if your projected net income looks healthy, perhaps the coming period is the right time to invest in equipment or other capital items that will allow your business to grow.
How to Make Your Business Budget Succeed
Creating a budget is all very well, but if you and your staff don’t stick to it, it becomes a pointless exercise. Communicate budgetary goals across your business and set aside regular times to review actual expenses and revenue versus your projections.