Having your own business involves many different elements. You may handle the day-to-day operations, hiring, finding new customers, and marketing. Making a budget for small businesses is an integral step to make sure you stay on top.
Budget planning for a business will help keep you financially fit. First, of course, you need to ensure that your business budgeting is detailed and accurate, so it’s an effective tool. But how to create a business budget when you’ve never made one before?
Creating a budget for business can be done using the five steps that we’ll explain in this guide of a small business.
Why Is Making a Budget for Small Business Important?
Would you want to guess what your business finances look like? Paying your rent, employees, and inventory aren’t things that you’re going to want to leave to chance.
Knowing what happened to your business two months ago or a year ago can help you better understand what to expect. For example, if your business tends to be very slow in January and February but then starts to pick up in the Spring, you can find ways to minimize expenses accordingly.
Unfortunately, business budgeting is something that often falls by the wayside, particularly when you’re just starting it. However, if your business is booming and your revenue keeps growing, company budget planning may not seem like something to focus on.
That’s why budgeting is important so you focus on long-term success. Budget planning for a business has many benefits, including:
- Showing you how your business may look in the future
- Keep control of costs and expenses associated with running it
- Making accurate estimates on when your business will become profitable
- Keep you from going into debt
- Become more efficient
- Zeroing in on funds that can be used for reinvestment
- Helping to predict slow months
Operating your business more efficiently becomes easier when creating a budget. With business budgeting, you’ll make the most of your money and keep yourself from getting into debt.
How to Create a Business Budget
Creating a budget and then following it are two of the key steps, whether you’re using it for your business or personal finances. You can use a simple business budget template on the internet if you want a basis to start.
Starting a budget when your business is new can be a bit more complicated.
That’s because you can use previous income and expenses that your business has had in the past to build that data. So when you’re starting a budget for a new business, you need to do some research on what type of costs are common in your industry so that you can forecast your finances.
Once you’ve done this legwork, though, your budget is easy to create and maintain. Let’s look at the five steps it takes when company budget planning below.
Step One: Add up all your Income Sources
To create a financial spreadsheet for small business, you need to determine how much money you’re going to make each month. In addition to that, you need to know where that money is coming from.
If you’re using software like FreshBooks, you can find your sales figures using your Profit & Loss report function. That will provide you with a lot of these numbers. Any other income sources that your business has should also be tallied.
Your business model will often determine how many different sources of income your business may have. For example, let’s say that you’re opening up a coffee shop; you’ll be making money from customers who buy goods by visiting your location (dine-in or to-go). You may also receive income from other businesses that supply your coffee beans for their office coffee. Another source of revenue could be from the coffee truck that you take to events around the city.
Some coffee shops may also generate income from customers who buy their coffee drinks during store hours. It all depends on how your business model works.
Whatever is the case, you need to make sure that you account for all those upcoming income. It would be best if you had this as accurate as possible to get a good idea of your total monthly payment.
Step Two: Figure Out Your Fixed Costs
Once you’re in a good place knowing how much income your business brings in, you can move on to your fixed costs. Any expenses that you have that are the same each month are considered your fixed costs. These may include costs such as:
- Salaries or wages
- Internet, phone, and certain other utilities
- Website hosting
Fixed costs can be unique to your small business. They may occur daily, weekly, monthly, or yearly, so make sure that you take the time to identify what they are for your specific business.
You can find these expenses by going through your bank statements or looking at reports on your Freshbooks account. You should be able to spot those costs that are consistent on these financials.
Now, if you are starting your business, you won’t have this information available to you. So you’ll need to figure out and project these costs. Some of them will be easier to determine than others. For example, when you signed a lease on your business space, that document should have your monthly rent amount.
You will subtract your fixed costs from your income, and then you’re ready to move on to step three of creating your business budget.
Step Three: Calculate Your Variable Costs
When identifying your fixed expenses, you’ve probably noticed that you have some variable costs. A variable cost is an expense that may change depending on certain circumstances. Typically it changes based on how little or much you use the service.
Some examples of variable costs include:
- Office supplies
- Marketing costs
- Professional development
- Owner’s salary
- Travel costs
- Shipping costs
- Sales commissions
Many of these costs are what’s called “discretionary expenses.” These are the things that would be nice to have but aren’t necessarily a function of your business. For example, this could be sending your sales employees to a sales training program that will hopefully improve their selling ability.
As your profits increase, you can typically spend more on these variable expenses to help scale your business faster. But during slow periods, your variable costs are where you need to trim your budget.
Find out how much these expenses tend to cost you on a month-to-month basis. If you have historical data, you may find certain months have spikes. You can budget accordingly based on this information. Next, add up all these variable expenses that are incurred each month. These will also be subtracted from your income amount.
Step 4: Determine your One-Time Costs
We all know from personal experience that when we have those high one-time costs, they never happen at a convenient time. For example, remember when your air conditioner needed to be replaced in the middle of July? Not only was that a hot two weeks until you could get someone scheduled to replace the unit, but you weren’t financially prepared for it.
These one-time costs will also happen when you’re running a business. Having emergency funds for business expenses when this occurs can make sure you have the cash on hand to handle these situations.
It’s tempting to use your extra funds to reinvest in your business or towards a variable expense. However, you should give emergency funds for business the highest priority. Being financially prepared to handle an equipment breakdown when it happens is valuable.
There are other options, of course, such as taking out a small business loan. But these courses are less favorable overall due to having to repay the loan with interest.
So consider any one-time costs you may have on the horizon, such as replacing a laptop or other equipment that is coming due to being replaced. Then add more funds, so you have a resource for any unexpected or emergency expenses.
If nothing happens, that’s great! But when you have something that happens which you didn’t expect, you’ll at least be prepared to handle the financial implications.
Step 5: Putting It Together
A financial spreadsheet for small businesses will have all your sources of income and expenses. It would be best if you put everything together so you know where you stand. Having all of these items accounted for will also help you calculate what your profitability looks like.
To see how this business budget could look like, here’s an example below based on a consultant business:
- Client 1 Earning: $5,000
- Client 2 Earning: $3,000
- Client 3 Earning: $4,000
- Client 4 Earning: $2,500
- Sales of Product: $1,000
- Investment Income: $500
Total Income: $16,000
- Rent: $750
- Internet: $100
- Insurance: $50
- Cell phone: $100
- Accounting costs: $150
- Website hosting $10
Total Fixed Costs: $1,160
- Electricity bill: $100
- Gas bill: $25
- Digital Advertising: $500
- Transportation: $100
Total Variable Expenses: $725
- Laptop: $1000
- Client gifts: $250
- Trade Event: $2,500
Total One-Time Costs: $3,750
Total Expenses: $5,635
Total Income ($16,000) – Total Expense ($5,635) = Total Net Income ($10,365)
Now that you know where you stand, you can make the right decisions for your business in the future. If you’re finding that your expenses are too close or more than your income, for example, then you need to find ways to reduce your expenses. You may also seek out new clients to increase your income.
Creating a Business Budget Tips
Creating a budget for business is often an afterthought for business owners. However, it may also be a new habit that you’re trying to build for the sake of being more financially savvy with your business. So you want to find ways to make the process of budgeting as efficient as possible.
That way, you can focus on your other business needs and use the business budget as a tool to guide decisions. Here are a few tips that will make the business budget process more efficient:
- Use a simple business budget template as your base so you can plug your numbers in easily. Smartsheet, Google Sheets, and Microsoft Excel are examples of different places you can find templates to use for your business budget. Find one that fits the needs of your business.
- Make a consistent habit of bookkeeping. Waiting until the end of the month to do your budget might work for some and not others. Choose a routine that fits in with your schedule. That could be tallying things up every Friday afternoon, the last day of the month, or something else. Having a consistent process will ensure that you’re staying on top of your business budget and making it a habit.
- Shop for suppliers and services. You can save a lot of money by shopping around for a new supplier. Don’t be afraid to make these changes. Ensure that you know when contracts are up, so you know when to start looking for other providers.
- Talk to a professional. If your hands are too full running other business aspects, you should consider seeking out help. An accountant or financial adviser can help you put together a financial and budget plan and explain how it works. They can also help assess your financial status and future plans. That advice is valuable and worth the cost.
Check benchmarks from your industry. Particularly when you’re starting a new business, there are many unknowns. Search the IRS website, talk to business owners, and check out the local library to find this information. It will come in handy when forecasting potential revenue and costs that your business may endure.