How to Create a Solid Small Business Budget

A budget is like a pre-set protocol to how you should spend your income. Without an effective budget for small business growth, you may find yourself squeezed for cash in the middle or end of the month or year. As a small business owner, it is almost mandatory for you to learn how to make a budget for a small business beforehand

A concrete budget will give you an overview of your business cash flow and help you to determine how much amount you will need to keep the wheels running. 

Building a small business budget may seem overwhelming, especially when you are just starting out. But it is essential to maintain financial stability and to navigate the road ahead with better clarity. This read will help you to create a solid small business budget to get your finances in order. 

 How to make a budget for a small business?

A small business budget is a roadmap

When you are creating a budget for your small business, you are making an educated guess on how and where to allocate your business finances. To do that effectively, you will need to go over your past records and analyse your last month’s spendings, last quarter’s, the same month of last year and their financial consequences.

Examine how your spending makes or breaks your profits. With this information at hand, you will be able to plan out wisely how to spend your money this month and the following months with better financial clarity. It will provide you an edge over how to budget your small business

For instance, if you are having consecutive slowdowns in your past three months, you should align your budget accordingly and tone down your expenses wherever possible.  On the other side of the picture, if the video that you had posted had gone viral, you are likely to have more customers. In such a scenario, you can take chances and spend some more dimes on inventory to meet your orders. 

The importance of budgeting in small business

Now you know how important a business budget is and why you should do it in the first place. Before we dig into how to build a business budget, let us take a closer look at the essential components that you should cover in your budget. 

The main purpose of a business budget is to manage your business finances effectively. So, you will have to pull in all the revenue and expenses of your small business to determine the net profit and loss. So, you will take into account the average order amount, the number of orders per month, billable employee hours, average payroll costs, raw material expenses or inventory, rent, mortgages and other utilities. 

Step by Step Guide to Create a Small Business Budget

Now you have got all your gears set and ready to create a budget for your small business. Follow these steps below to create one.

#01 Account in all forms of income

The first step in creating a budget is aggregating all forms of income. According to your business model, you will have various sources of income. Add the income from all the sources to find out the total revenue for your business. 

Always include your revenue, not your profit. Revenue is the total amount of income and profit is what you get after you settle all your expenses. With your net income, you can take steps on how much you can afford on your expenses. This solid step is effective to create a small business budget.

If you can get information for the past 12 months or more, you can clearly analyse your income pattern and see if the pattern changes seasonally. For instance, your business might face a slow down during the summer holidays. By understanding this seasonal pattern, you can prepare well in advance for leaner months and make arrangements to fill financial gaps. 

#02 Determine your fixed expenses

Once you have added all your income, you should deduct your fixed expenses. Fixed costs are the usual expenses for your business operation. These fixed costs might occur yearly, monthly or even daily. Your fixed costs might include your commercial rent or mortgages, loan payments, operational supplies, employee payroll, insurances, taxes and depreciation of assets. 

Every business is unique and yours may have more fixed expenses other than these. Make sure to account for all your fixed costs associated with your small business. Add them up together and get a solid number.

#03 Estimate your variable expenses

Apart from the fixed expenses, there are also some variable expenses. These are the monthly operational expenses that include material costs, commissions, outsourced billable hours and marketing costs. You can’t accurately say how much you are going to be spending each month on variable expenses this year. However, you can come to a rough estimate with your older records. 

There are also some expenses that you might be spending for, that are not a necessity but nice to haves. 

Those are the amounts that you spend on professional development, replacing old equipment and office improvements. These are also called discretionary expenses. We would suggest you to investigate your variable expenses to understand the importance of budgeting in small business.

During lean months, you should consider taming down your variable expenses, starting with the discretionary expenses. And you can invest in these when you have money in surplus. However, in this step, you will identify your variable expenses and will get a rough number.

#04 Prepare for emergency and contingency situations

As a business owner, you must be already familiar with some expenses looming at an unexpected time. Repairing equipment, hiring expenses and unplanned events happen anytime. Such things do not always happen when we are financially convenient. 

You can’t predict these expenses and estimate how much it is going to cost. So, you should set aside some cash to meet those emergencies with some financial confidence. 

#05 Create a profit and loss statement

Once you are done determining all the above-mentioned numbers, it is time to put them all together to create a profit and loss statement for your small business. 

You have already done the major part of the work. You are just a step away from knowing your business profit or loss. All you have to do is add all your income (step 1) and add all your expenses (steps 2, 3 & 4) together. Now subtract your net expenses from your income. Hope you get a positive number to understand how to make a budget for a small business .

A positive number, as a result, indicates profit and a negative one means it is a loss. But that’s okay, too. You cannot always expect a desirable result. But with better budgeting, you can set your business up for a more profitable future. 

#06 Draft your small business budget

After reviewing your profit and loss statement, you will get a clear picture of how you are spending. With this analysis, you can frame a business budget for the next year, quarter or month. Most small businesses run on quarterly budgets. 

Understand your business’ profit and loss. Know your business’ seasonal ups and downs and determine which investments are worth repeating and what to avoid in the next year or month.  Your budget should outline your business expenditure and set limits for monthly expenses. With this outline, you can understand if you are earning and spending within your abilities. 

Takeaway

Budgeting may seem like an exerting process when you are starting out. But efficient small business budgets can steer clear of your financial hurdles by intimating you about your business’ upcoming financial trend. The one thing that is expected from your budget is clear numbers. You will determine your profit and loss and build your new budget for your small business with historical data. 

You can get precise information about your business transactions when they get recorded into your accounting software directly. Automated bookkeeping tools like PayTraQer automatically import all your ongoing sales and transactions into QuickBooks from your payment system or e-commerce site as they happen. With such applications you can get accurate numbers to make clear, data-driven budgeting decisions.