Whether you’re starting a new company or looking to better understand the finances of your existing business, creating a budget is always a good idea. Having a clear financial structure to work with informs every business decision you make. A clear structure can help your small business achieve financial goals, manage debt effectively, monitor performance, get ready for emergencies, assign resources and control cash flow.
Creating a budget for your business has enormous benefits. With so many benefits it’s a bit surprising that recent surveys show that half of small businesses fail to make an official budget. Some companies, especially smaller ones, may be unsure how to figure out the budget for their future operations. But, with just a few short steps, you too can develop an accurate budget for your small business.
Step #1: Cost analysis
The first step is to list everything you need to spend money on. All companies generate expenses and regardless of how you pay them, whether it’s an easy bill paying service for businesses or doing it all yourself, you should strive to create accurate predictions of your costs.
It’s helpful to separate these costs into three categories:
- Fixed costs: Set recurring expenses paid at regular intervals (i.e., weekly, monthly, quarterly, etc.) that keep the business operating. Examples could include rent, utilities, internet, insurance, or credit card fees.
- Variable costs: Expenses that fluctuate depending on the volume of goods or services the business provides. Variable costs associated with your business might be raw materials or payroll.
- One-time costs: More prevalent during the early stages of a business, these are one-off purchases needed for the company to operate. This could be the initial equipment, hardware, software, office furniture, website domain, logo design, or anything else that gets the company up and running. Another example could be replacing equipment after an accident, although this can be harder to predict and budget for.
Research each expense thoroughly to project your start-up costs and what your expected fixed and variable monthly expenses are going to be.
Step #2: Projecting income
To pay all of your expenses, you’ll need to bring in revenue. Projecting future income provides goals for your business to aim for and creates a reference point to compare monthly sales.
Projecting income differs depending on whether you’re a new or existing business. When you’re already up and running, you have previous data to work with. Past sale numbers act as a starting point for analysis and future forecasts. While many factors can affect your sale figures, you should use empirical data to base your projections on in order to get a closer handle on your actual revenue.
Unfortunately, the task is significantly harder for new businesses. Without established customer relationships, sales projections can be extremely challenging to predict. The best approach is to do your due diligence and conduct extensive market research on your target audience and competitors. This can help you project revenue by giving you an idea of the size of your audience and how to set prices.
Overestimating future income has been the downfall of many businesses, and you should always project as realistically as possible. If the incoming funds can’t keep up with your costs, you’ll need to take action like downsizing, financing or finding other ways to save money.
Step #3: Tracking spending and sales
You should constantly track both spending and sales to compare to your initial forecasts. Looking at actual revenue vs projected revenue tells you how well your business is doing. Monitoring performance can come in the form of various financial statements. Two of the most popular are profit and loss reports, and balance sheets. These documents should also become significant sources of information for existing businesses predicting costs and income (steps 1 & 2).
A profit and loss report lets you know if your business is making money. With a detailed Google sheet profit and loss template, you can always create yours and use it to compare all the money you’re generating to all the money you’re spending.
In comparison, a balance sheet is a snapshot showing what your business is worth on a specific date. It considers everything you own (assets) vs everything you owe (liabilities) to define your company’s equity.
Step #4: Review, analyze, and adjust
Using these financial statements, gives you a bird’s eye view of how your company did in relation to the original budget. You can use this information to make more informed decisions in the future. For example, if your revenue was better than expected you may think of expanding your business. On the other hand, if you didn’t do as well as projected, you may want to re-evaluate in order to reduce losses, or adapt to new trends.
Budgets aren’t static projections; they shift in response to new information. So whatever adjustments you need to make, you can position yourself for better results by reviewing and analyzing your budget.
While you can’t make comparisons on a daily basis, you should create a schedule to actively review and adjust your budget. This could be monthly or in a reaction to significant events such as an unexpected major expense or landing a big new client.
Another option is to budget for various scenarios. This can be especially helpful for small or new businesses with greater uncertainty. Generating budgets that depend on multiple factors can give companies the flexibility and agility to respond to market changes.
With greater market volatility, smaller businesses may find it harder to build accurate long-term budgets. In these instances, it’s still beneficial to produce projections over shorter time frames and review them more frequently.
Budgeting and staying in control
Producing a meaningful budget can take significant time and effort. However, armed with accurate projections for your spending and sales, you can take control and make effective spending decisions. Budgets form the basis for future purchases and expenses. Which can prevent you from overextending with a risky investment or allowing you to make savings by buying in bulk where possible.
Budgeting gives you the confidence to make the right financial decisions for a given situation. It paints a clear picture of what and where you can spend your money and puts you in control of your business.
Ingrid Maldine is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Ingrid’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Ingrid has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Ingrid has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.
