For a lot of people, business budgeting can seem like a daunting task. A lot of small business owners don’t know where to start, and it can start to feel like a chore. However, when done right, a budget can help save time and money for the future, making it an invaluable tool for small and large businesses alike.
So as a business owner, how can you go about creating a budget for your small business?
How To Budget
You will need to know how to budget your business appropriately within the confines of the market and industry. This means that the figures and numbers that will make up your budget will differ from industry to industry and business to business.
To budget, you will first need to gather your business’s essential financial data. It is this information you take from your company’s financial statements that will help you to create an accurate and detailed budget. These documents include:
- Income Statement: Your business revenue from the previous accounting periods will help you determine what your average sales revenues are and how much you can expect to bring in each month. Use these recurring income figures to forecast the expected income for the future.
- Balance Sheet: Using the balance sheet, you can figure out your profit margin and assets and liabilities, figuring out how much you make and spend within a given accounting period.
- Cash Flow Statement: Track cash flow to figure out where the money is entering your business and where it is exiting the business. These statements and projections can help your budget immensely as they monitor and record how the money is being generated and used within the company.
If you are just starting, your budget will look quite different from a well-established business’. You will need to research your industry to determine the average sales revenues and typical budgeting expenses and profit margin, as you will not have previous financial data to draw upon when starting this process. Over time you will improve your figures’ accuracy as you begin to gather relevant financial information on your business’s sales and bills.
Once you have these documents, this is how you use the information to prepare a budget for a company.
How to Create a Business Budget
With those financial statements at the ready, you can start pulling the figures surrounding your business’s assets and liabilities, as well as income and expenses. Begin by following these steps needed for creating a budget for your business.
You can also use this small business budget template alongside this guide to help create a comprehensive and detailed budget. Here’s how you prepare a budget for a company.
Determine fixed costs
Fixed costs refer to the expenses that do not change from one month to the next. These are necessary and recurring expenses that your business spends to operate normally. Such costs include rent, phone bills, insurance, debt repayments, and business supplies.
Check your financial statements to ensure you have accounted for all fixed expenses, whether they happen monthly, quarterly, bi-annually, or annually. You won’t want to miss any figures, as those that go unaccounted for can rear their ugly head later in the year, throwing your budget out of whack.
Remember, your fixed costs will differ from another business’s fixed costs, depending on the industry as well as the internal and external processes governing your business. List and add up all fixed costs to calculate your total fixed expenses. Set that figure aside and then move on to the next step.
Add up income sources
Your income source is the revenue generated from your business’s normal operations and activities. How does your company make its money? Do you sell services, goods, or both? Depending on the type of business you own and operate, you could have multiple income sources or just the primary one. Want to generate more revenue for your business? Here are 11 steps to create more income sources.
Look to your previous existing income numbers on your financial statements- specifically the income statement and balance sheet- to locate all relevant sources of income. What are your sales revenue, profits, and all other revenues generated by your business? You will need to ensure you have accounted for all sources of income, including interest made on investments and business savings accounts.
Once you have accounted for all income sources, add up those figures to determine your total income. Set that figure aside.
Include variable expenses
Now is the time to account for your variable expenses. In contrast to fixed costs, variable expenses, or variable costs, are those expenses that do change over time and from month to month. These operating expenses include utility bills, shipping costs, inventory costs, marketing expenses, and professional development and fees.
Certain variable costs that fall into this category can be considered ‘discretionary expenses.’Discretionary expenses are costs associated with your business that are not necessary for its operation but can still bring added value in their own way. These are the expenses you will want to keep an eye on throughout the year. During lean times, you can cut back on these costs, as not to eat into profits. During profitable turns, your business spending money can be used to invest in these expenses for long-term benefits.
Therefore, when creating small business budgets, make note of all variable expenses with a list of necessary costs and those that can be cut down when needed.
Factor in one-time expenses
One-off costs to your business are typically large business expenses that happen every once in a long while. Generally, companies will pay one-time expenses, or capital expenditures, when acquiring new assets for their operations, such as technology, real estate, a vehicle, equipment, and machinery.
It is best to plan ahead and always add these future one-time expenses during the budgeting process to ensure you have the financial resources to cover them without worry. As the business owner, you are the one responsible for checking and double-checking these numbers when you create your budget.
Don’t forget an emergency fund
Budgets are never complete without a safety net. When budgeting for your business, you will want to include a rainy day fund that will provide you with extra financial support during unexpected emergencies or hardships.
A small business emergency fund will hold your company in good stead should any financial issues arise in the future. The market is always changing, and customer demand can be unpredictable; therefore, a sound business strategy is to plan for the unexpected future.
Businesses should always have a plan in place to tackle any emergency, not just a financial crisis. When planning for your small business emergency fund, also consider what other unexpected events you should brace for. Use this emergency preparation checklist to help your business prepare accordingly.
Prepare the budget for your company
Once you have taken all of these items into account, now is the time to put it all together. This is where the business budgeting process takes shape as we begin factoring in the business’s expenses and revenue generation.
You will want to add up your:
- Fixed costs
- Variable expenses
- One-time expenses
And subtract that number from your
- Income sources
You will also want to ensure that your small business has set aside funds from your income and profits to cover unexpected expenses should they arise. The final number will inform you whether or not your business has a positive or negative cash flow, meaning do you make enough money to cover all of your expenses and have some leftover?
Once you understand these numbers and determine your financial position using this budget outline, you can start to make the decisions that will help improve your business. Can you cut down on certain expenses? Can you add another source of income to your company? These are the questions you can ask yourself once you have this filled in the budget in front of you.
Using Accounting Software to Stay Accountable
If you want to learn how to make a budget and stick to it, then try using accounting and bookkeeping software alongside your newly created budget to help you stay accountable.
Manage bills, monitor cash flow, and track expenses to ensure your small business budget is working! Join the millions of other small businesses that have improved their revenue and decreased expenses with the help of QuickBooks Online. Try it free today.