Successfully creating a budget is a crucial aspect of running a business. Budgets provide an efficient way for business owners to organize financial information, project revenue outcomes and gain deeper insight into their company’s financial health. While the initial process of creating a budget may seem daunting, its usefulness is well worth the effort.
Creating a Small Business Budget
Budgets are useful for a number of reasons, Inc. explains. They can track expenses, offer future financial estimates and target financial inconsistencies. Business owners who seek additional funding can use them to secure commercial loans. Employees use them to better understand the situation of the companies for which they work. In short, budgets are broadly applicable and relevant.
When drafting a budget, it is easiest if a business owner already possesses information on past company finances. Those who are just beginning their companies, however, can certainly create successful budgets without this information. Below are some suggested steps for doing so.
How to Create a Small Business Budget
Choose a timeline.
Many business owners structure their budgets to reflect monthly activity. At a minimum, a small business budget should track financials annually.
The best way to understand where a business is going is to look at where it’s been. New business owners who lack past financial information must make the effort to become familiar with monetary concerns relevant to their industry.
A key element of research is understanding the kind of expenses a business can expect during operations. There are two main types: fixed and variable. Fixed expenses remain the same from month to month, QuickBooks says. Some may include:
- Rent and utilities
- Fixed salaries
- Phone bills and technology costs
- Legal, accounting and bookkeeping fees
Variable expenses change from month to month. These can include:
- Marketing and advertising costs
- Unfixed wages
- Costs related to customer service
- Raw materials
- Packaging, postage and freight
The more research you do on expenses, the more realistic a budget can become.
It should be noted that research is a continual process. New business owners can be successful in developing future budgets by investigating all relevant areas and staying informed on financial changes within their industry.
Decide on target sales and profit.
After gaining a better understanding of what your venture might cost, new business owners can then begin to think about realistic profit and sales goals. This will help give direction and structure to your operations. You should also be mindful of less-considered factors that may impact your sales numbers, such as the health of the economy.
Forecasting revenue means reviewing data and making informed assumptions about what sort of future income you might expect. While continuing to research, new business owners may consider the following:
- Targeted customer base, service area, market position and how each might affect sales
- Adjustments on income that can be expected due to the time of year
- How sales are generally calculated in the industry
- How often customers can be expected to buy goods or services
Projecting sales volume can then be calculated with the following equation:
Number of customers x average sales price x number of yearly purchases = yearly projected sales
When total projected expenses are deducted from yearly projected sales, it equates to a company’s revenue forecast.
It is prudent to calculate these numbers several times. QuickBooks suggests doing three calculations: an optimistic projection, a pessimistic one and another in between. Averaging the results of these three calculations will result in a more accurate number.
Make a spreadsheet.
Finally, creating a spreadsheet is a way to easily organize financial information. Spreadsheets should contain sections for both projected and actual expenses, as well as revenue.
Below is a sample template designed to help new business owners get started in creating their budgets.
Becoming a Business Professional
For those with dreams of entrepreneurship, gaining a fundamental understanding of business essentials is key to success. The online Bachelor of Science in Business Administration from Husson University offers students the opportunity to learn from a relevant curriculum that easily translates to the real world. This fully online program allows you the flexibility to earn your bachelor’s degree at a pace that works for you.