A budget is essential to the successful operation of your small business. Not only does it help you manage your costs, but it can guide you in determining whether or not your objectives are realistic and focusing your efforts and financial resources on your most important goals.
A sound budget becomes a valuable tool for evaluating monthly progress as well as planning ahead. For example, you can anticipate peak periods and ensure you have adequate staff and inventory to handle the increase in sales volume. In addition, 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.
If you haven’t created a business budget for 2019, now is the time. Starting with these basics will help you put together a budget that allows you to track cash, business expenses, and how much revenue you need to meet your business goals:
What should a basic budget include?
In its simplest form, a budget is a detailed plan of future income and expenditures. A basic budget should include your revenues, costs, and profits or cash flow. Most yearly budgets are divided into 12 months and allow you to compare estimates with actual results as the year unfolds. You may want to work with an accountant to prepare a budget, or you can do it yourself using small business financial software or free budget worksheets and templates that are available online.
Develop sales and profit targets.
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 changes in the economy or the loss of a major customer. Some business owners create multiple budgets in order to be prepared for different scenarios.
Determine 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.
Calculate 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.
Review and adjust your budget monthly.
Your business is constantly evolving, and your budget should keep pace. Review and update your budget monthly, examining expenses and income from the previous month while keeping sight of the financial goals or targets you’ve set for the year. Look at efforts that have been successful as well as issues that could impact budgeted sales and expenses, positively or negatively. This will allow you to adjust your budget and financial expectations month after month, manage cash flow, and identify and address potential problems before they happen.
Despite careful budgeting, small businesses can experience unexpected circumstances that leave them short of funds. Summit Financial Resources provides working capital financing programs that help small businesses stabilize their cash flow. For example, our core product, invoice factoring, allows you to harness the cash in your accounts receivable to cover shortages whenever they arise. This makes it an effective cash management strategy for every successful small business owner.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.