Whether you’re starting a new business or planning for your existing business’s year ahead, you’ll need to make a business budget. Budgeting is essential for understanding your small business’s capabilities and situating it for financial success.
You don’t want to skip this important business planning step. Budgeting allows you to make smart decisions for your business’s financial future. Here’s a simple guide to help you build your small business’s budget.
Determine your budget length
Most businesses make an annual operating budget as well as shorter—quarterly or even monthly—budgets. Some even forecast further, such as five years. What kind of budget you’ll need will depend on your goals and the information you have available.
Keep in mind that if you are starting a new business this year and applying for a loan, projections will be requested by the bank. It’s a good idea when applying for a loan or obtaining start-up capital that you plan for a minimum of three years into the future. Don’t just fund the start-up phase; consider the additional capital you’ll need to move out of start-up and into growth focus.
Look to the past to plan ahead
The first step in building your business budget is looking at projected revenue—how much money you expect your business to make. Business budgeting differs somewhat from personal budgeting because there’s no guarantee of how much money your business will make. You’ll need to make educated guesses for a given quarter or year to create the most accurate budget possible. This is particularly true for brand-new businesses that don’t have sales data to examine. You’ll need to do more research into similar business in your market and industry to generate estimated numbers.
Total up your incoming revenue from all sources in a given month. This should be all the money that comes in before expenses. If it’s possible, look at data from the past 12 months to uncover seasonal changes and get an average monthly income.
Examine your costs
Every business has fixed costs. These are fixed expenses that occur regularly, like rent, insurance, payroll, taxes and loan payments. Itemize each fixed cost and note the amount due and how often you pay (weekly, monthly, yearly, etc.). Total up all of these fixed costs and subtract the total from your revenue.
Next, you’ll want to identify variable expenses. Unlike fixed costs, these expenses might occur at irregular intervals or “as needed”—perhaps a few times a year. Utilities, office supplies, new equipment and even your salary are all variable expenses.
You should also total up discretionary expenses, which aren’t necessary for your business to operate but are nice to have. Itemize and total both variable and discretionary expenses and deduct those from your revenue, as well.
Note funds for savings and cash reserve
If there is money left over after your business’s expenses, it’s a good idea to set some aside in a cash reserve. This pool of money is a “rainy day fund” that helps cover costs when cash flow is low or in an emergency.
Identify a reasonable amount of money to save in this reserve each month and subtract it from your revenue. Budgeting for this item ensures that you’ve planned to save, rather than doing it when you remember or spending extra cash on discretionary items.
Look at profit and losses
With the totals for your revenue and your fixed, variable, discretionary and reserve expenses, you can create a profit and loss statement. Subtract the expenses from the revenue and see what’s left. A positive amount is a profit, while a negative amount is a loss.
Looking at these numbers each month, quarter and year allows you to determine how your business is faring financially and how it will fare in the future.
Examine trends and build a forward-looking plan
This is when you truly create your budget. Examine your profit and loss statement and your itemized expenses. Then, build a budget to forecast the year, quarter or month ahead. If your business is consistently losing money, find ways to trim costs—starting with discretionary expenses. Also look for trends in seasonality so you can anticipate slower months or more profitable seasons.
When you build a small business budget, you’re able to see when your business needs more capital to operate successfully. If you need a cash infusion, contact Tenet Financial Group! We connect business owners to products like ROBS and unsecured lines of credit to ensure you have the money you need to run.