Small business owners and entrepreneurs commonly shrink away from the concept of business budgeting. While being a visionary is thrilling, acting as a financial manager can be daunting. Therefore, some business owners launch and attempt to manage a company without a budget in place.
Whether you are planning to start a successful business or are hoping to make informed financial decisions for an existing business in the coming months, creating a budget is critical. Below, we provide a guide into how to budget for your small business, beginning with calculating income and expenses.
Why is a Business Budget Important?
Maintaining a structured overview of your small business finances in the form of a budget is critical for long-term success. For startups, creating a business budget should be one of the first tasks accomplished.
A business budget is critical for making sound financial decisions based on real data, identifying extraneous spending, and receiving funding for business growth. It is important to note that as your business grows and changes, your budget will follow suit.
Where Should You Start?
If you have an established business with budgetary results from last year, utilize this data to begin. Where did you fall short of the budget? Where did you exceed it?
Keep these items in mind while creating an updated budget for the upcoming months. New businesses without past data should utilize the steps below with informed predictions. As time continues, the budget will mold into a solidified financial guide based on your business’ financial data.
How to Create a Business Budget
Creating a business budget begins by calculating how much money your business brings in monthly. Also, be sure to note every source of income, beginning with sales figures. Of course, the number and type of income source will differ, depending on your business.
For example, a local coffee shop may calculate store sales as a singular source of income. A training and development consultant may calculate merchandise sales, the number of online courses sold, and private training sessions as separate income sources.
Regardless of your small business model, calculate every source of income for an accurate picture of total monthly earning. As time goes on, you will be able to identify income trends and patterns – perhaps seasonal – and budget accordingly.
Keep in mind that during this point in the process, you are calculating revenue, not profit. Profit takes costs into account, while revenue is the sum of all monthly income before expenses are subtracted.
Next, determine your monthly costs to facilitate in creating an accurate and comprehensive business budget. Expenses should be divided into two categories: fixed and variable.
Fixed Costs are expenses that do not change month to month. Common items under this category include payroll costs, rent, internet plans, and website hosting. If you have past data, utilize this to properly identify consistent costs.
Variable Costs differ every month, depending on external factors like business activity. For example, usage-based utilities, travel costs, or shipping costs may be included in this category.
If you are just starting a business, you won’t have past data to pull from while calculating fixed and variable costs. In this case, use projected costs – predictable expenses, such as rent for an office space lease, that you will begin paying in the future.
Calculate One-Time Costs
Apart from fixed and variable expenses incurred monthly, your business will face infrequent costs as well. These are just as important to predict and factor into your small business budget as month-to-month expenses. A new piece of technology or an upcoming seminar are examples of such costs.
Additionally, always factor a buffer into your budget to cover unplanned costs such as equipment repair or replacement. Room in the business budget for unexpected expenses protects your business from sudden, potentially crippling, financial burdens.
Determine Overall Profitability
Finally, pull income and expenses together to determine overall profitability. Begin by tallying your total income and expenses. Subtracting these will uncover comprehensive profitability and inform important business decisions, such as investing in growth or eliminating unnecessary variable expenses.
To provide a visualization of all the pieces in one monthly budget, we outlined a simple business budget for the consultant mentioned above:
Merchandise Sales: $550
Online Course Sales: $1,000
Private Training Sessions: $3,550
Total Income: $5,100
Office Rent: $1,000
Website Hosting: $20
Digital Marketing: $100
Print-On-Demand Services: $250
Training Books: $50
Electricity Bill: $75
Water Bill: $50
Gas Bill: $50
New Office Furniture: $250
February Training Space Rental: $500
Total Expenses: $2,520
Total Income ($5,100) – Total Expenses ($2,520) = Total Net Income ($2,580)
Based on the total net income, business owners can make informed decisions to improve profitability.
For example, with a surplus of total net income, you may choose to reinvest in business growth. If your company is in the red – spending more than you earned – it may be best to cut costs wherever possible. Ultimately, your monthly business budget is a critical guide to keep you on track for future success.
Financial Guidance with DHJJ
At DHJJ, we know your business is going somewhere – and we want to help guide it in the right direction. Our business health assessment provides business owners with valuable information regarding internal controls, compliance-related details, budgeting, and value-added services.
After our assessment, we help prioritize your goals and benchmark your progress. Ready to partner with a business advisor and identify your company’s opportunities? Please reach out to our team at 630.420.1360 or get in touch via our online contact form!