The daily operation of running a small business pulls you in many directions. A lot happens throughout the day, but you always have to be looking at the big financial picture. The best way to do that is by creating and monitoring a budget for your small business.
If you’re just starting out, or want to make sure your business’s existing budget is working for you, we’ll simplify the process and give you tips, templates and some things to consider to make sure you are taking control of your financial future.
Importance of Budgets
The main goal of your business is to turn a profit. It would be great to not worry about how you get there, but every sale and expenditure means a lot when you look at your year-end income. By following a budget, you’re keeping a detailed plan of future revenue and expenses to effectively forecast and manage your business’s future.
For startups, researching and planning for your first year can be the difference between sinking or swimming as you dive into business ownership. Established businesses utilize budgets to take into account their past and learn what they can do as they grow.
Some of the main benefits of an effective small business budget include:
- Planning expenses to meet profit expectations
- Assisting in making realistic financial goals
- Identifying monthly or seasonal trends in revenue and expenses
- Adapting to these trends to scale your business
- Tracking cash on hand against future finances
- Catching future financial roadblocks before they become an issue
Without a sound budget, your business is floating downriver without a paddle. You might think you know where you’re headed, but you can’t shift course before you encounter an issue and you may not end up where you want to be.
If you can plan, create and utilize an effective budget, you’ll put yourself in the best position to succeed as an owner.
Planning Your Budget
The most important part of creating your budget is having the right data to draw from. If you don’t have all of your business’s financial history at your hands, or you’re a startup and have nothing to go off of, your budget won’t have the necessary background info to be effective.
If you’re an established business owner, this means looking over your financial statements. Your income and cash flow statements—as well as your balance sheet—will give you the data you need to draw conclusions when forming and reviewing your budget.
As a startup, you will not have this information. At some point in writing your business plan, you had to think about realistic expectations for potential income. Leverage relationships with others in your industry or past experiences you have had working within it to gauge what you should see in your first year. It may take a while to be able to get some of the more advanced speculative benefits of it, but this information will help you when initially setting up your budget.
Now that you have the information in front of you, it’s time to apply it to creating a budget for the next year. Getting to your desired profit is as simple as calculating and subtracting expenses from your total revenue.
To begin, take a look at your revenue. If you’re a startup, this means making realistic expectations based on your industry. For others, simply look back at your business’s income in past months, quarters and years. See if you notice any trends that could help you forecast when you could expect more or less income throughout the year. Doing so will allow you to plan whether to be conservative or aggressive with your expenses during those times.
The next thing to consider is your expenses. Costs will vary depending on your business’s industry and size, but they can generally be broken down into four categories:
Costs that do not change over the course of a year. These can include rent, equipment leases, vendor applications and insurance.
Costs that constantly change depending on the current sales of your business and the needs those numbers present. Raw materials, inventory, shipping and commissions are examples of variable costs.
These are fixed costs that periodically change to coincide with the growth and decline within your business. For example, you may increase your marketing and advertising budgets or decide to bring on new employees when business is booming.
These unexpected costs can be damaging to businesses that do not budget correctly. It’s wise to consider leaving room in the budget each month to put away money into an “emergency” fund. The last thing you want is to be blindsided when a piece of expensive equipment goes down and you need to put a down payment on a loan to replace it.
Interpreting the Data
Having all of the information in front of you is great, but it means nothing if you can’t use it to make conclusions about how to set up your budget.
For revenue, it’s usually best to temper your expectations. If you made $100,000 last year but less than $75,000 the two years prior, you might not want to expect the same type of success. This is especially true for startups. Even if you think you have a good idea of what similar businesses bring in, it may be more difficult for you to reach those numbers as you just start out.
It’s important to consider all expenses that your business incurs. No payment is too small, so use your financial statements to track each and every expenditure. A few dollars here and there can add up and leave you wondering why you aren’t reaching the profits you forecasted in your initial budget. When it comes to determining your company’s future, it’s best to leave no stone unturned.
Try to be conservative when projecting your business’s expenses. You can put in variances per month or year if you’re sure you’ll spend differently, but be careful not to expect too much. It may be tempting to say that you’ll spend less to try and raise profits for your bottom line, but you may be setting the bar higher than you can reach.
Turning Data Into Profit
After approximating the income and costs that you may incur, it’s time to calculate profits. Follow this simple formula:
Revenue – Expenses = Profit
Once you have an idea of your small business’s potential profits, you can begin to base decisions off of them to create a budget going forward. If your calculation shows a net loss, you will want to figure out how to reduce costs while maintaining a good balance of revenue. If not, you can formulate a plan to increase expenditures like marketing and advertising that could boost sales even more.
Creating a Small Business Budget
Finally, it’s time to put pen to paper (or finger to keyboard) to draw up your budget. This can be a daunting task given how much data there is to pore through. You might consider hiring an accountant to assist you, but there are options online that allow you to plug the numbers in for yourself.
Online Business Budget Templates
Creating documents that are important to the success of your business has never been easier. If you don’t already have dedicated accounting software that offers it, you can still get intuitive templates to create your small business budget. Here are a few providers who offer free options:
Just input all of your data and make your adjustments and your budget is ready to go!
Keeping Up With Your Business Budget
After you create a yearly budget for your small business, it’s important to update it continually. Monthly, you should go back in and see if your performance justifies making some changes. Are you spending more than you thought? Bringing in less? Any deviation from what you had predicted could make it necessary to adjust what you do going forward.
Other reasons to make changes can be proactive or reactive. If there is a need to replace broken furniture or your biggest client has closed down, you’ll have to adapt your budget to make things work. If everything is going well, you may want to add some money into the marketing budget to try and increase sales. Be sure to track how all of your changes perform, moving money around to make sure you are setting your business up for maximum profit.