Building a solid budget for your business will help you determine how much money you have, how much you need to spend, and how much you need to bring in to keep your business growing. Establishing a formal budgeting process improves your chances of succeeding by helping you anticipate future needs, spending, profits, and cash flow as well as identify and address potential problems.
Banks and commercial lenders typically want to see a budget when you ask for a business loan. Senior-level employees should also have access to the budget or be included in the drafting process so they understand where the business is going and what their priorities should be.
While managing finances is not every small business owner’s strong suit, it is relatively easy to put together a simple budget that will allow you to track cash, business expenses, and how much revenue you need to meet your business goals.
Why you need a business budget.
Estimating and matching expenses to revenue is important because it helps small business owners determine whether they have enough money to fund operations, expand the business, and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in or not spending enough money to be competitive.
A budget can also help you minimize risk to your business. For example, you should create a budget before you sign a new lease or invest in new machinery or equipment so you know what you can afford before committing to spending a certain amount every month.
A 12-month budget can be updated with actual expenditures and revenues so you know you’re on target. If you’re missing the estimates set out in your budget, you can use it to troubleshoot by reducing expenses, increasing sales, or lowering your profit expectations.
What should be included?
A budget should include your revenues, costs, and profits or cash flow. Most yearly budgets are divided into 12 months and should include blank columns next to your estimates to fill in with your actual results as the year progresses. You may want to consult an accountant in preparing a budget, but you also can do it yourself using small business financial software or free budget worksheets and templates that are available online.
Start by targeting sales and profits.
Start out by developing a target for your sales revenues. This information will drive the rest of your estimates for costs, expenses, and capital expenditures. For a startup business, begin by estimating what type of realistic profit you’d like to see in the coming year. You may have to make assumptions based on your geographic area, hours of operation, and by researching other local businesses.
If you have been in business for a while, take your company’s most recent financial statements and use those business trends as the basis for developing your sales and profit targets. Take into consideration factors that might affect your sales numbers, such as the economy or the loss of a major customer, and be realistic. If you did a million dollars in sales last year, chances are you are not going to jump to $100 million this year. Some business owners create multiple budgets in order to be prepared for different scenarios.
Calculate operating expenses.
After you’ve gathered this information, you can match your business revenue to your expenses. The goal is to determine your average weekly operating expenses including overhead, utilities, labor, and raw materials.
Your recent financial statements should include an itemized list of the fixed and variable expenses you’ve previously incurred, including salaries and wages, rent, postage, research, travel, utilities, and taxes. Be sure to pay attention to your sales cycle. Many businesses go through busy and slow periods over the course of the year. If your business is seasonal, you’ll need to account for your expenses during the off-season.
If you’re just starting out, brainstorm with your team or colleagues to make sure you factor in all the costs you will incur.
A data-driven budget can be a valuable tool when you need to make large investments in your business. Some major expenses occur unexpectedly, but planned expenses like property renovations, equipment purchases, or upgrading software systems can be carefully timed and budgeted for to avoid burdening your business financially.
Determine your gross profit margin.
Gross profit margin is a profitability ratio that measures how much of every dollar of revenue is left over after paying the cost of goods sold. Based on this information, you can then estimate whether you will have enough extra money to expand the business or will need to generate more sales to cover the cost of adding employees or product lines. Either way, it’s important to use realistic numbers so your budget becomes an effective tool for guiding your business
Revisit your budget regularly.
Small business budgeting is not an exact science. Although you may estimate that the business will generate a certain rate of revenue growth or that expenses will be fixed or can be controlled, these are estimates and not set in stone.
Your budget will change and evolve along with your business, and you’ll need to be prepared to make adjustments based on your growth and profit patterns. It may turn out that you set your sales figures too high when an economic slump hits your business, or you might land a new client that doubles your business.
Revisiting your budget on a regular basis helps you maintain a clear picture of your business finances. You will know exactly what you can afford to spend versus how much you are projecting to make. This process is essential for small business owners who want to ensure that enough money is available to keep their operation up and running, cover emergencies, and compete effectively in the marketplace.
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