Most problems in business start with money, and many small businesses fail to get off the ground because they’re always running out of cash. A comprehensive budget goes a long way in eliminating obstacles that are related to money in your company, so you can focus on growing your business in other areas.
So today, we’re going to take a look at how you can create an accurate budget for your small business. We’ll explore what you’ll need for your budget, how to make sense of it all, and provide you with budgeting software options that will make this part of your financial journey easier. Let’s dive in!
Creating a Foolproof Budget
On a high level, a budget is an estimate of your income minus expenses over a set period of time. It is taking the goals of your business and marrying them with your expected income and expenditure, to produce a financial plan that will carry your business into the future and beyond.
Here’s what we’ll be covering today:
- Understand your goals and what you wish to achieve with your business.
- Identify your expenses and set aside a rainy-day fund.
- Establish your predicted income.
- Determine your budget deficit or surplus and make the necessary adjustments.
- Use budgeting tools and software to help you along your way.
All successful businesses begin by setting clear goals for themselves. This is an action plan for what you want your business to achieve over a set period, typically highlighted in your company’s mission statement. Having distinct goals sets the direction of the company, is a great source of motivation, and can increase performance as you fight to meet those goals.
Setting a budget is more than just creating an income-expenses spreadsheet. Knowing how you want to spend your money will give you a clearer indication of whether your hard-earned cash is actually being spent in the right places.
Understanding Your Goals
The first step in creating a budget is understanding how you want that budget to work for you. That means evaluating:
- How you want your business to grow
- The direction you’d like your company to take
- The values and ideals that you would like to be prevalent at your new small business.
Once you’ve established all of this, you’ll be able to begin researching how much money you’ll need to bring your dreams to life.
Once you know what your company wants to achieve, you can start predicting the costs of your vision and come up with a proper spending plan. It begins with listing all your expenses; everything that your business will have to pay for.
Some business costs can be easily overlooked, and a good budget ends the game of financial hide-and-seek by revealing and eliminating unnecessary expenses to bring you closer to achieving your goals, quicker.
Evaluating Your Fixed Expenses
Expenses can be broken up into two main categories and because they remain constant, we will start with evaluating your fixed expenses.
Fixed expenses are the amounts that you will be paying every week, month, or year, and they never change for that set period. Examples include rent, insurance premiums, vehicle repayments, and real estate taxes.
For businesses with low overheads, these expenses, when totalled, are likely to be the highest amount payable.
Assessing Your Variable Expenses
Like the ebb and flow of a rising then dwindling tide, variable expenses are difficult to predict, but they will definitely happen. These are the costs that come and go depending on your needs, fluctuating markets and interest rates, and changing suppliers, to name a few.
Variable expenses can be seen in supplier contracts that may change from month to month, shipping and distribution costs, utilities like water and electricity, tax (if it’s based on performance), and sales commissions.
You could also have one-time expenses such as buying equipment, paying a consultant, or dealing with an unexpected event like a fire or theft. Be sure to account for these as well.
Establishing a Rainy-day Fund
Just as you do personally, a business also needs to save and set aside money for when it needs it most. Your savings will be labelled as an expense as you’ll be paying money into the account without the business receiving anything in return. But when that savings account matures, you’ll be giving yourself multiple pats on the back for having the foresight to protect your business's financial future.
Predicting Your Income
The next step in drawing up your company’s budget is to predict your expected income. This process is easier for established businesses as they can draw on their performance from previous years. However, for new small business owners, you’ll be required to think a little harder about the money that you expect to hit your bank account.
To start, sales will make up the bulk of your company’s income. Further down the road, you could be earning from returns on investment, selling assets, advertising, subscriptions, and rentals if you are a landlord.
It’s important to be realistic in all areas when making your budget, but specifically when calculating your anticipated income. If you overestimate your earnings, you could be left with a budget deficit that could be damaging to your business. If you under-calculate, then you’ll be missing out on available funds that could’ve been used to help you grow.
Now that you know the money that is coming in and going out of your business, you can bring the two together to ascertain your company’s cash flow.
Working Out Your Budget Surplus or deficit
Here’s a simple formula to calculate your expenses:
Your estimated income - your calculated expenses = Surplus or deficit
If the remaining balance is positive, then you have a surplus.
If it’s negative, then you have a budget deficit - and some work to do.
A budget surplus will indicate that you made a profit and you will have a healthy cash flow. This is the money that is still available to you after all expenses have been paid. A positive cash flow means that there are funds that are available to improve and reinvest in your business, and it provides a safety net for unexpected expenditures.
A deficit in your budget means that you’re running at a loss and are spending more cash than your business is generating. In this case, you’ll have to re-evaluate your expenses and cut all unnecessary costs. Downsizing and downgrading where you can will help improve your cash flow. You may also have to be more honest with yourself about the income you are expecting.
Just remember that a business can still survive if it’s not profitable for a month or two. And many new businesses may not make a profit for those initial months. The key is doing a quick budget revaluation and attending to the areas that need fixing as soon as possible. So try not to panic, and instead take action toward bringing your goals to fruition.
Looking to level up your money management skills, check out 8 Money Management Tips to Boost Your Business!
5. Budgeting Resources
Tools to Help with Your Budget
Now, you may be reading this and wondering how the heck you can put all this together by yourself. Well, luckily we are in the information age so there are many resources to help you not only create your budget but track your spending as well. Here are our top budgeting tool suggestions:
Run your business like a pro with these 6 Best Business Management Apps!
Your Budget in 5 Simple Steps
Budgeting is as important as the first rains of Spring: it brings hope and breathes new life into your business, and provides a platform for growth. Remember to constantly measure your budget against your actual income and expenses, and make as many changes as necessary to ensure the longevity of your new business. Well, what are you waiting for? The time to set your budget is right now!
Still thinking of the perfect business idea? Here are 30 Low-Cost Businesses to Start in 2023.