Budgeting is an essential skill for both personal and business use. Companies, just like people, need to understand their finances to successfully operate. If you’re in need of a budget for your business, you’ve come to the right place.
Learn what a budget is, why it should be essential to do, and what to include when budgeting for small businesses.
These topics will help you understand more about small business budgets and it’s role in small business management:
- How to Plan a Budget for your Small Business
- How to Create a Small Business Budget
- Small Business Budget Template
- Top Small Business Budget Tips
- Best Budgeting Apps for Small Businesses
What Is Budgeting?
Budgeting is the action of planning your finances to fit within the confines of your cash flow. Both individuals and companies will budget their financial resources to ensure their day-to-day operations and expenses can continue as normal.
A budget is a document overview of a person’s or a business’s financial situation. By extension, a business budget refers to the budget that covers the operations of a business. Many companies will use budgets to help them plan their finances for the coming year or accounting period.
So why is a budget important, and how can it help individuals and businesses?
Why Is Budgeting Important?
Budget planning for businesses is a must. Understanding how much money you have in your business is an essential part of properly managing a company’s finances. A business budget allows the small business owner to make pertinent business decisions based on the information in front of them.
By understanding how much money you have within the company, you can decide how best to spend it, eliminating expenses and improving savings to reinvest into the business.
Therefore, the budget process is an essential part of running a business as it:
- Gives an overview of the business’s current financial position
- Provides insight to make better business decisions
- Shows how much revenue you need to make to cover expenses
- Shows where to cut down on operation costs to save money
- Illustrates how much money you can reinvest back into the company
- Portrays your current financial standing against industry standards and the competition
Budgets for Different Types of Companies
Small business budgets will differ depending on the industry or type of company or business department the budget is based around. Different types of companies possess unique financial requirements and business needs that will need to be determined during the budgeting process. For example, depending on the size and operations of your business, your average marketing budget will change for small, medium, and large companies.
By extension, the type of business you run will have differing overhead costs, management processes, and operating expenses. As such, budgets across these industries will focus on various financial strains and issues, so you will need to factor these in when you create your budget.
1. Seasonal businesses
Budgets are especially vital for seasonal businesses. It requires you to track the ebb and flow of revenue during the peak season to cover the offseason. As business demands are continuously changing from month to month, a budget can help you obtain an overview of the past, present, and future finances to prepare accordingly.
Take advantage of your slow seasonal business to plan for the future, and create those budgets that will help you improve your business performance during those peak months.
2. E-commerce businesses
E-commerce, or electronic commerce, refers to businesses that operate online. Many companies these days operate online, buying or selling their products or services through the internet. E-commerce businesses will have different needs from brick and mortar businesses.
Such businesses might not have to spend money on office rent or a storefront, but they will have more significant costs surrounding shipping and web hosting services. Packaging and shipping costs greatly impact e-commerce budgets, so you will want to account for such things if you run a business online. Learn more about how e-commerce businesses drive sales on a budget.
3. Inventory businesses
Inventory budget planning is a tricky sort. Planning your finances for inventory businesses means you will need to factor in the volume of inventory and purchasing and storage costs associated with these sellable goods. Researching your suppliers’ prices and creating an inventory budget can help you save money when next you meet with vendors, brokering a better deal for future business.
4. Custom order businesses
Customer order businesses should focus their operating budget on the cost of materials, equipment, and labour. A business budget should take into account averages of these costs, as no two orders and no two months will create the same business figures. Custom order companies will want to have extra cash in reserve on their budget to ensure they are covered during slower months.
5. Service businesses
Service businesses will need to have a flexible budget as their finances fluctuate based on their services and demands. When we say service businesses, we are discussing non-physical products, such as knowledge. Accounting, legal, creative, and insurance companies make their money based on billable hours and customer demand, which will vary month to month. A budget should consider emergency funds to cover expenses when there is less demand for these services.
Budgets for startup businesses need to be well planned, full of information and foresight. As many companies that start cannot take from existing models, they will need to figure out the financial details for themselves. Industry comparisons and market research can help new small business owners create a budget that would work within their company’s industry. The expenses will be higher in the beginning, meaning your budget will need to account for these added costs with extra capital before your business begins to take off.
What to Include When Budgeting
When creating a business budget, you will need to take into account five variables.
These five variables to include in your budget are as follows:
- Fixed Costs: Recognize what your fixed costs are; these are expenses that do not change from month to month- such as your office rent and phone bill. List out all fixed costs with the corresponding amount, and then add them all together to obtain your total fixed costs by month or year.
- Income Sources: List and add together all of your income sources to determine how much revenue you generate within a period. Depending on your business operations, you could have one or multiple sources of income. This includes interest made on investments or business savings accounts.
- Variable Expenses: Variables expenses refer to costs that change from month to month; these are the opposite of fixed costs. Variable expenses include electricity and utilities, depending on how much you use within a month. A budget can help you monitor these expenses over time and scale these costs to a manageable amount.
- One-Time Expenses: Your biggest expenses typically only happen once. If you are acquiring real estate for your business, or a new piece of equipment or industry-related asset (and are purchasing outright), you will want to list all of your large, one-off expenses.
- Emergency Funds: Don’t forget to take into account emergency funds for those rainy day issues. It is best to budget with a cushion or an emergency fund to allow for a little wiggle room should an unexpected expense arise.
Business Budget Example
For a business budget example, let’s take a look at Roger and his company, Book Emporium. Roger has been running his book store for a year now but can’t seem to keep his finances in order. He, therefore, decides to create a business budget to help him monitor his cash flow and manage his finances each month.
When planning his budget, Roger will need to determine his revenue and income, as well as all business expenses within a month. He can take a look at his financial records to determine his typical income and expenses in a given month and create columns in his budget with the appropriate figures. Roger will use his budget to track Book Emporium’s business against his projected budget, with an aim to stick to his budgeted figures. His budget should have a column for budgets income and expenses, a column for what he actually made and spent in that time, and the difference between the two.
Business Budget Template
Need help creating a budget for your business? Here you can find a free downloadable PDF of a small business budget template to use when creating your own business’s budget planning.
What Is The Average Startup Cost of a Small Business in Canada?
When opening a start-up in Canada, you will typically need at least $5,000 to $10,000 in the bank as stated by the Canada Startups organization. This amount will also depend upon what type of business you are opening, and within what industry, as there are various factors that could require more or less money when starting out.
One of the biggest issues new business owners face with a startup is the lack of available cash. After a few months of business, the cash flow runs out faster than expected, and the business cannot operate. Therefore, when opening a startup, ensure you have the extra cash available should you need it.
Bookkeeping and Business Budgeting
If you’re looking to create a budget for a small business and stick to your financial planning, then consider using quality accounting software alongside your business budget planning to ensure your company sticks to its predicted costs!
Sync your business accounts to QuickBooks Online to take advantage of the expense tracking, financial reporting, and cash flow projections to keep your expenses and revenue in line. And you can connect your budget apps to the software to cover all your financial needs in one place. Try it free today!