Creating a budget allows you to see how much money you have, how much money you’ve spent, and how much money you’ll require in the future. A budget can help you make key business decisions like reducing unnecessary expenses, hiring more people, or buying new equipment. You can keep your business out of debt or find ways to lessen the debt it already has with the correct budgeting plan. A detailed line-item budget can also be utilized to get bank or other financial institution business loans. Here’s a step by step guide on how to create a business budget.
How to create a Budget for Your Business:
1. Examine your earnings.
The first stage in any budgeting activity is to go backwards in business and identify all of your revenue (or income) sources. To find out how much money comes into your business on a monthly basis, add all of those income streams together.
Make sure to calculate revenue rather than profit when calculating your income. Before expenses are eliminated, your revenue is the total amount of money that enters the business. After expenses are eliminated, profit is what is left.
Calculate your monthly income after you’ve identified all of your sources of revenue. It’s critical to conduct this over a period of months – preferably at least the prior 12 months, if you have that much data.
You can evaluate how your monthly income fluctuates over time and look for seasonal patterns if you have 12 months (or more) of data. For example, your business may encounter a slowdown after the holidays or during the hot summer months. Knowing about these seasonal shifts will allow you to plan ahead for the slower months and provide you with a financial cushion.
2. Subtract the fixed costs from the total.
Adding up all of your fixed costs is the second stage in creating a business budget. Any expenditure that is required on a recurring basis for the running of your business is referred to as fixed costs. Fixed costs can occur on a daily, weekly, monthly, or even yearly basis, so gather as much information as possible.
The following are some examples of fixed costs in your business:
- Repayment of debt.
- Asset depreciation is the process of reducing the value of an asset over time.
Your small business is unique, thus your fixed costs will differ from those listed here. Take a few minutes to develop a list of any other fixed costs that your business may have.
After you’ve discovered your company’s fixed costs, remove these from your revenue and go to the following stage.
3. Calculate variable expenses
While looking for the information you need to identify your fixed costs, you may have observed that your business has some variable expenses as well.
Variable expenses are those that fluctuate based on how much you utilize a service. Many of these, such as utilities, are required for your business to operate.
You’ll also find expenses here that aren’t strictly necessary for the operation of your business but would be nice to have, such as schooling or extras that can boost profits. Those are referred to as “discretionary expenses,” and they can also be rolled into your variable expenses fund.
Variable expenses include examples like:
- Replacement of Old equipment.
- Office Supplies.
- Professional development.
- Incurred Marketing costs.
You’ll need to cut your business’s variable expenses, starting with discretionary spending, during lean months. However, you can raise your expenditure on variable expenses for the long-term benefit of your business during lucrative months when there is additional cash.
4. Set up a reserve fund for unforeseen costs.
We all know that one-time costs don’t occur when it’s convenient, whether you’ve run a business previously or not. The refrigerator breaks down the day before you host your entire family for Thanksgiving. Your automobile breaks down as you’re driving to the most important presentation of your career.
These costs pop up when you least expect them, and frequently when you’re on a budget. When budgeting for your business, make sure you have some extra cash on hand and plan for contingencies within your budget to avoid the worry of unforeseen costs.
Although you may be tempted to spend any extra money on variable expenses, instead put some money aside for an emergency fund. That way, you’ll be prepared if equipment breaks down and needs to be replaced, or if inventory is damaged by water and needs to be replaced fast. Of course, a small business loan is always an option — but having more options is preferable to having fewer.
We hope that the adage remains true for every business owner: If your budget is for a crisis, the emergency never happens. What happens if an emergency arises? You’ve budgeted for it, after all. Isn’t it true that this isn’t a true emergency?
5. Create a profit and loss statement (P&L).
After you’ve gathered all of the aforementioned data, you’ll need to put it all together to create your profit and loss statement, or P&L. You can find free marketing profit and loss statement templates on Liveflow and other similar online platforms.
We understand that even discussing a P&L might cause anxiety. But keep in mind that you’ve already completed the task. It’s also addition and subtraction: add up all of your monthly revenue and minus all of your monthly expenses. After that, deduct the expenses from the income and hope for a favourable result.
You’ve made a profit if you do! If not, it’s a loss — and that’s fine as well. Small businesses don’t make money every month, much less every year. This is especially true when your business is just getting started.
6. Create a budget for your future business.
Projecting what will happen to your business in the future, whether you’re a new business or have been in operation for a long, is informed speculation. If you’ve been in business for a time, you’ll find that your estimations are more accurate (as you might, well, guess).
A budget serves as a road map for your business. It assists you in forecasting cash flow, identifying functional areas for improvement, and running your business smoothly. Successful organizations devote a significant amount of time and attention to creating realistic budgets because they are an effective tool to track how far the business has progressed toward its objectives. For new businesses, creating a budget can be intimidating because there are no previous figures to guide their budget estimates. However, with some estimates based on competitor performance and an understanding of the components of a budget, you can complete your first budget and have a good road map for future budgets.