Every successful business needs a budget, and here are some tips on how to make one that works for you.
It’s a basic principle of business – before you can make money you have to figure out how to spend it. Drafting a budget is essential to turning your dreams for business success into reality. This key business tool will allow you to track cash on hand, business expenses, and how much revenue you need to keep your business growing. The simple act of recording these numbers greatly enhances the chances of succeeding with your business. It may also help you spot problems before they become major issues, so that you can address them and make changes.
Your business budget is like a road map. You need it to understand where you’re going with your business. It is also your GPS system, giving you insights into how your business is performing from month to month and year to year. You’ll know whether you have the necessary funds to purchase equipment for example, or where cuts can be made to improve performance.
Why Your Business Needs a Budget
The bottom line on why to create a budget for your business is that it
will help you determine how much money you have, how much you need to spend, and how much you need to bring in to reach your business goals. But there are other good reasons, too. Bankers and other financiers may want to see a budget when you ask for a loan. And employees should also know about the budget so that they
understand where the business is going and are motivated to help get there. Everybody should know what the goal of the company is. Success is a team effort and you can’t expect your staff to meet your goals if they don’t know what they are.
Budgets can also help you minimize risk to your business. Don’t go blindly into signing a new lease or investing in new machinery or equipment. Create a budget first. It’s better to find out that you can’t afford new office space before you commit to spending money every month on a lease.
According to the U.S. Small Business Administration, a budget can be
used to indicate some of the following:
- The funds needed for labor and/or materials.
- Total start-up costs for a new business.
- Costs of operations.
- The revenues necessary to support the business.
- A realistic estimate of expected profits.
You can use this information to tweak your plans and expectations going forward. Update your 12-month budget with actual expenditures and revenues each month and you’ll know if you’re on target or not. If you’re missing the targets set out in your budget, you can use it to troubleshoot by figuring out what changes to different line items will do to the bottom line, like reducing labor expenses, or spending on new computers, or increase sales by more aggressive marketing, or maybe even lowering your profit expectations.
Components of a Budget
A budget should include your revenues, your costs, and– most importantly– your profits or cash flow so that you can figure out whether you have any money left over for capital improvements or capital expenses. A budget should be tabulated at least yearly. Most yearly budgets are also divided up into 12 months, with blank columns next to your estimates to fill in with your actual results as the year progresses. You may want to consult an accountant in preparing a budget, but it also may be something you can do yourself with small business financial software and/or some of the free budget worksheets and templates available online.
Here are some tips on preparing a small business budget from SCORE.
- Write down the key assumptions before spending much effort calculating all the monthly details. In other words, develop the general road map before crunching the calculator.
- For revenue, list the major products and services you offer and the number of current and expected customers by end of the year. Most important, list the product pricing and volumes expected in the coming year. List the key components of the marketing plan that will cause these sales to occur—sales team, advertising, website, email marketing, channel partners, use of social media, etc.
- What is important to know about these sales? For example, are there freight charges that are important to track, how about returns? If you charge sales taxes, keep these amounts separate as this is the government’s money. Are they cash sales or do you provide credit terms?
- List the three cost categories separately in your budget: variable costs (those directly associated with the production of a product like labor and materials), semi-fixed (like advertising, that can be increased or decreased over time), and fixed costs (rent, insurance, most staff, audit, etc.)
- Expenses are usually easier to forecast than sales, so provide contingencies. For example, over the year you might reduce budgeted sales by 20 percent and increase expenses by 10 percent. It is better to under promise and over deliver.
- While a budget can be handwritten in a notebook, it is best to use software, either created with your accounting system or with an Excel spreadsheet. Preparing a budget is an iterative process. It is unlikely you will like the results of your first try, so you will tweak the assumptions and then change the numbers accordingly. Be careful not to fool yourself by changing numbers to get desired results without changing assumptions and then testing the reality of the new assumption.
Source: How to Set Up and Maintain a Budget for Your Small Business
Once you have your budget in order. Take time to go back and readjust the figures. Given the estimations for sales and expenses, you most likely will want to go back and readjust your estimates to
reach your profit targets. The result may be that you purchase fewer new supplies in the coming year or you may need to add two new employees. Factor in these adjusted costs and or savings and run the
numbers again. Do this as many times as necessary to reach your monetary goals.
The more you understand about your company finances, you may realize you need the help of an accountant or business consultant. Either way, remember that it’s important to use realistic figures so that your budget can help you guide your business.
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