Your small business needs a budget but when you are starting out it can be tempting to skip this step. That would be a mistake, because a budget is a powerful tool to ensure the financial health of your small business. A realistic budget enables you to make confident financial decisions and save money for future investment and expansion. On top of this, your budget will prevent you from overspending and provide concrete goals against which you can measure your success.
It can be difficult to know where to start when it comes to creating a budget, particularly during your first year in business. You will need to work with estimates if this is the case, but it will still make financial planning much easier. Once you have laid out a realistic budget, you will be able to adjust it as necessary rather than starting from scratch. Here are six easy steps to creating a realistic budget for your small business.
1. Calculate Your Income
Business income is the money you receive from clients/customers for your goods or services. This is easy to work out from your records if you have been in business for a while, but if you are just starting out, you will need to make an estimate. Try to be as realistic as possible but if in doubt, always err on the side of caution. It is better to be conservative with your budget than risk overspending.
If you have been in business for a year or more, take some time to analyze seasonal trends. If you are new, do some research on patterns within your industry. Many small businesses experience a boom in sales at Christmas, followed by a lull in January. It is important to plan for these peaks and troughs as accurately as you can.
2. Determine Your Costs
Once you have worked out your projected income, it is time to look at your expenses. Business costs fall into three different categories: fixed, semi-variable and variable.
Fixed: these costs are the easiest ones to calculate. Fixed costs are the expenses that are likely to remain the same for the next year or so, such as rent, internet and insurance.
Semi-variable: this is a bit of a grey area. Semi-variable costs are fixed costs which may increase or decrease in proportion to your workload. For example, a boom in sales might result in increased hires, phone bills or power usage.
Variables: these expenses are directly linked to your number of sales, such as commissions or raw materials. This is the part of your budget that you are most likely to have to tweak over time. You can calculate this by adding together all your variable costs over a given period and then dividing them by your production volume.
3. Factor in One-Off Expenses
You need some wiggle room in your budget in case things go wrong. Unforeseen expenses do crop up every now as then, so you need to be ready for them. For example, if a piece of equipment breaks down, you will need to replace it as soon as possible so that it does not impede productivity. Of course, some one-off expenses are planned, such as annual expenses like business licenses, liability insurance, professional dues, facility upgrades or conferences. Keep a separate fund for this type of cost and do not be tempted to put it towards your regular expenses.
4. Work Out Your Profit
Your profit represents how much money you are making. You could have a huge income, but much if it can be outweighed by even larger costs. To calculate your profit, subtract your costs from your income.
A budget does not mean much if you do not review it regularly, and a lot of can change in a surprisingly short amount of time. It is vital to keep checking your budget and adjusting whenever necessary. Each month set aside some time to check your finances and compare them against your plan. This will keep you on track and allow you to keep your budget relevant to your business.
6. Use Bookkeeping Tools
Staying on top of your budget can be time-consuming, especially when your business is growing, and you have got a million other things to do. Cloud-based bookkeeping software is the easiest and most reliable way to keep track of your expenses and you will have 24/7 access to your records from anywhere in the world, so long as there is an internet connection.
The Importance of Budgeting
A realistic budget for your business makes it so much easier to plan. However, regularly reviewing and adjusting your budget is essential, or it could quickly become outdated. Your budget is a roadmap for your business, and it helps you to prepare for all manner of situations. Most importantly, it gives you control over your finances, which will help your business not just to survive, but to flourish.
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This document is for educational purposes only and may not apply to your income tax situation.