Creating a small business budget helps you stay within your means and either remain or work towards becoming cash flow positive. A budget helps you understand what you have to use towards growing your business, purchasing new equipment and hiring new employees. Creating a sound budget will prevent you from accidentally overspending and can make the difference between your business staying afloat or sinking. Here are a few things to keep in mind.
In order to successfully create your budget you’ll need to review your income statements and see how much revenue your company is earning as well as necessary expenses. This will require that you estimate your future revenue based on figures over the last year. Your estimate should be conservative in nature and be a realistic portrayal of what’s achievable. If you are just starting out and haven’t been in business long enough to use data from the previous year, do some market research or speak to others in the same industry to create an educated guess.
This part is just as tricky as estimating future sales. Factors like inflation, increases in price, and the need for more of a particular utility, service, or material can vary over time. These costs should be divided depending on their variability into categories such as semi-variable, variable, or fixed.
- Fixed-These expenses remain the same regardless of the amount of product or service that you produce. Rent, insurance, leased furniture or car payments are good examples of fixed expenses.
- Variable-This type of expense directly correlates to how much product you are producing and is a reflection of the materials used, freight or inventory.
- Semi-variable-These costs and expenses may need to fluctuate depending on how your business is doing. They include items like marketing, salaries and telecommunications.
Profits are variable but can be estimated by subtracting your projected expenses from your projected revenues. This is the amount of money you have to expand your business, purchase new equipment or software, provide employees with bonuses or raises and add staff. If you’re uncomfortable with the calculated amount, contact an accountant, banker or trade association for their input.
Drafting your Small Business Budget
Your budget should be drafted for an entire year. Conservatively estimate your revenues and expenses for each month and list them in your budget. Calculate your gross profit by estimating the cost of the goods sold (goods purchased and/or manufactured, shipping charges, beginning inventory) and subtract it from your sales revenues.
Be prepared to make adjustments to the budget as necessary for things that occur over the course of the year like hiring employees, increasing sales and increasing costs. Should the economy change over the course of the year and result in reduced or increased sales, you’ll need to make an adjustment to your budget. For example, if you estimate that you will have revenues of $120,000 per year or $10,000 per month, but you’re only earning $9,000, then you need to change the monthly figure for future months to $9,000 or get on the horn and sell more products and services.
A budget is a plan and it’s a useful tool to keep you on track. Be sure to adjust it if you see trends that are either financially positive or negative. While this may seem a bit nerve-wracking at first, as you get used to creating and adjusting your budget over time it will become second nature.