Most people cringe when they hear the word “budget.” They remember when their parents told them they couldn’t have something because “we’re on a budget.” Or they remember a boss who couldn’t give them a raise because of “budget cuts.” So it’s no wonder that “budgeting” gets a bad reputation.
What is a business budget?
Budgeting is simply a tool used to review the inflow and outflow of money in your business. A business budget helps show you where your money came from (revenue) and where it went (expenses).
Why is a business budget important?
A business budget is important because it is a powerful tool that can help you achieve your professional goals and lead to more profitability in your business.
In addition, a budget provides essential information and data to help you strategically manage your business and make wise business decisions. It can even help you plan for what income and expenses you can anticipate in the future.
How to create a budget for a small business
Here are 6 steps for creating a budget for your small business.
Step 1: Set a business goal
As stated before, most people don’t like the idea of budgeting. So to stay motivated, it’s important to start with your business goals. For example, does your business have debt it needs to pay off? Do you want to give yourself or your employees a raise? Are you in need of new equipment or looking to expand? Budgeting can help with your goals, but you need to be clear on what your business goals are first.
Step 2: Figure out how much you need to achieve your goal
A budget is simply a tool to help you have more clarity about your business finances. This clarity can then help you make business decisions. Now that you know what your business goals are, it’s important to think about how much those goals will cost so you can factor them into your business budget.
Step 3: Figure out how much you spend
Now that you know why you’re budgeting and how it can help you achieve your goals, it’s time to roll up your sleeves and create your budget. The best way to start is to figure out how much you spend every month on your business.
If your business goals require you to spend more, you’ll also want to project those additional expenses into your business budget to see how that will affect your bottom line.
You can start by looking at your recurring fixed expenses. These are the expenses that take place every month and are the same amount. For example, these could be your internet bill, phone bill, mortgage/lease expenses, monthly subscriptions, debt payments, and so on. These shouldn’t be hard to find since they happen every month and are the same every month.
If your business goals require you to spend more money, you can start projecting those expenses into your business budget as well.
The next step takes a bit more energy. First, you’ll need to think about your variable expenses. These can be tricky because they fluctuate in amount and frequency. For example, this could include business meals, fuel, office supplies, utilities, marketing costs, training and development, consulting fees, gifts, repairs, bank fees, entertainment, and so on.
On occasion, you will have expenses that only happen once. It’s also important to consider these expenses when creating your business budget. Even if you don’t anticipate additional expenses, it’s important to create a cushion in your budget for unplanned or emergency expenses.
For fixed and variable expenses, it helps to look back at past bank and credit card statements on a month-by-month basis to look for trends and expenses you may have forgotten about.
Step 4: Figure Out How Much Revenue You Bring In
Your revenue is an important number to be aware of. Think about your products and services and notate how much each brings in every month and every year. It’s important to count the total revenue, not just the profit.
Tracking this every month can help you plan because you can start looking for and seeing trends in your business. For example, if you notice that your sales peak during certain months and slump during other months, you may be experiencing the effects of seasoniltiy in your business. Once you know this, you can use that information to prepare for the slumps so they don’t catch you off guard.
Step 5: Create your Profit and Loss Statement
It’s important to know where all of your money came from and where it all went. The best way to view this is with a profit and loss statement. Knowing the total coming in and the total coming out will help you determine whether or not your business was profitable or operating at a loss.
A simple way to determine if you’re operating with a profit or a loss is to add up all your income and subtract your expenses from that number. If the number you end up with is positive, congratulations, you are operating at a profit. If it’s zero, you are breaking even, and if it’s negative, you are operating at a loss.
Step 6: Make Strategic Business Decisions
Now that you have a basic business budget and have clarity around your profitability (or lack thereof), you can use this data to make strategic business decisions.
For example, if you are operating at a loss and you had the goal of giving yourself a pay raise, you have three options: you can make budget cuts, work to increase your revenue, or do a combination of the two.
Now that you can easily review your business expenses from month to month, it will be easier to spot trends and look for ways to save money. For example, you may notice that materials costs are going up unnecessarily. In this case, you may want to call your supplier to discuss this or look for a new supplier that charges less.
Once your revenue sources are visible, you may be able to spot opportunities as well. For example, you may notice a highly profitable product or service, but you aren’t marketing it as heavily as your less-profitable offerings. In this case, you could decide to invest more time or money into marketing that offering and then review the financial impact a few months in the future.
Remember, you can easily “play” with this document to make financial projections. For example, you can create “what if” scenarios and project how that would affect your business’s bottom line. To illustrate this, let’s say you decide to hire another employee.
While this would certainly increase your expenses, it may be justified if the new person could free up time for your best salesperson, allowing them to close more deals. By punching the projected expenses and additional revenue into your budget, you can see how decisions like these could affect your bottom line.
Putting it all together
You may not be ready to invest in software like Quickbooks to manage your business budget when you’re first getting started. In that case, you can access small business budget templates like this one from Microsoft or this one from Gusto.
At the end of the day, it doesn’t matter how you create your business budget as long as it works for you and helps you make strategic business decisions.