How to Create a Budget for a Small Business
Starting a small business or working as a freelancer comes with many responsibilities, including managing your cash flow and operating within a set business budget.
Smart budgeting can tide you over when business is slow and informs you when it's safe to start spending money to expand your company.
This article will guide how to build a budget for a small business and which tools can help you plan and execute said budget successfully.
What Is a Small Business Budget?
Your business budget estimates your company's revenue and expenses over a specific period (usually a year). This overview outlines critical information about the current state of your finances and your long-term financial goals.
In other words: Your budget drives most of your crucial business decisions.
Why Should You Draw Up a Business Budget?
Any business can operate without a budget, but no business can thrive for long without one. A budget helps you see the bigger picture and determine how your company will look from month to month, year to year.
Having a budget in place helps you:
Secure Enough Funding
Your budget is an essential part of your larger business plan and necessary for starting a new business, mainly if you apply for a business loan. At the start of your business, you need a budget to determine your start-up and operating costs to get off the ground. Once you are more established, budgeting is done on a quarterly or annual basis.
Create a Business Road Map
As a business owner, you probably know where you would like your business to go, how much you want to earn, and what to achieve. Your budget breaks your financial objective into more accessible, attainable milestones you can follow to achieve your end goal.
Identify Areas to Cut or Grow
Your budget pinpoints excess funds that can be reinvested to grow your business, as well as areas where you can reduce your spending. Your budget also identifies trends, including seasonality, so you can prepare for slow months or scale up at times of higher demand. In either case, with a budget, you can increase your profitability and become more efficient.
How Do You Create a Business Budget?
Before you start calculating your business budget, gather your financial information. If you have started your business and don't have financial data yet, use projections based on benchmarks or market research you've done.
Establish What Your Fixed Costs Are
Your fixed costs are any business costs that stay constant, no matter how many goods you produce or how many services are delivered. Examples of your fixed costs include:
- Rental lease payments
- Property Tax
- Interest-related expenses
- Website Hosting
- Specific utilities (e.g., Internet connectivity, phone plans)
Review your expenses and see which costs are the same month-to-month to determine this figure. Then add up these expenses to arrive at your total fixed cost expenses per month.
Make a Revenue Estimation
It's much simpler to determine how much you'll spend each month than to figure out what you will earn and from which sources. As a start, you can review your current sales figures and pending invoices to make a prediction.
Link all income sources you need to record all figures to get a clear picture of your total monthly income.
Suppose you don't have historical data to review. In that case, a simple way to create a revenue projection is by multiplying the expected number of sales and the average sales or service price.
As a calculation, this is expressed as Revenue = Sales x Average Price of Sales.
Determine What Your Variable Expenses Are
Variable expenses are the costs that change as the quantity of the good or service you produce increases or decreases and varies from month to month. That can include usage-based utilities (e.g., gas), shipping costs, sales commissions, and phone bills, to name a few.
When profits are lower, you should look at cutting your variable costs back to boost your revenues. Then add up your variable expenses at the end of each month. Eventually, you'll be able to predict how your variable costs will fluctuate over time, which can assist you with future projections.
Try to Predict One-Time Spending
While most of your fixed and variable costs are related to regular, predictable expenses that you pay for each month, there are bound to be a few expenses you need to pay much less frequently. It's important to factor those possible one-time expenses into your budget to avoid cash flow problems.
One-time expenses could include:
- Purchasing new laptops for new hires
- Maintenance of company vehicles
- Upgrades and repairs to equipment
While you might be tempted to spend your surplus expenses, it's always a good idea to set aside some money as a bugger for sudden and unexpected costs to avoid financial constraints. So, when something unexpected happens, you know you are covered!
Project Your Cash Flow
Cash flow is slightly different from revenue projections. As a small business owner, you are making payments to vendors and receiving payments from customers regularly. Both components need to be balanced to keep your cash flow optimized.
Customers may have different payment terms or channels. Therefore it is vital to remain flexible and integrate with as many leading payment channels as possible. Unfortunately, you will invariably deal with customers who do not comply with your payment terms. That could wreak havoc with your cash flow.
Try to give clients a grace period and set penalties and policies that govern and control late payments. Ensure you include these terms on your invoice template and allocate some money in your budget to bad debt in case some customers never pay. On top of this, you should also have some petty cash on hand for ad hoc office expenses and set travel budgets for your staff.
Factor in Seasonal and Industry Trends
Most businesses experience peaks and troughs during an annual cycle. Companies sell more lawnmowers, convertible cars, and air conditioners during summer than they do in winter. Toy companies thrive in December, and flower companies move more bouquets in February for Valentine's Day. Electronic companies can expect a dip before Black Friday as consumers hold off on big purchases until the sales start.
Due to seasonal changes and industry trends, you have to plan for slower periods and scale up during times of higher demand.
Keeping an eye on your business performance over time should help you plan and keep your doors open, even during low sales periods. In fact, you need to generate enough revenue during peak times to sustain your business during slow seasons. You may also want to consider additional revenue streams during off-season periods or introduce discounts to encourage purchases in the off-season.
Set Your Spending Goals
You may have a clear idea of your costs and earnings, but you also need to set goals and spend your money sensibly to avoid unnecessary debt or expenses. Hence, carefully examine where you can trim fat in your business.
Would it be cheaper, in the long run, if you purchase a large printer copier than using a business center for your printing?
Is your social media page delivering enough leads to warrant continued investment, or should you divert the funds elsewhere?
Knowing where you are going helps you set the right spending goals to get there.
Put It All Together With Your Profit and Loss Statement
Once you've collected the above information, you can create a profit and loss statement. While the losses have negative connotations, not all businesses will be profitable from the get-go.
To calculate your profit and loss statement, simply add your income and expenses together and subtract one from another. If you have a positive number at the end, you've made a profit. If not, you've made a loss. And don't worry if you are in the red—one bad month won't sink a business.
Review your budget to weed out unnecessary expenses and keep your profits aside for months when business is slower.
Make Budgeting Efficient
Unless you run a finance company, chances are you didn't start your company because you love writing up budgets and finance plans. Unfortunately, it's one of those tasks you can't avoid, so make it as easy on yourself as possible.
You don't have to be a chartered accountant to create regular, accurate budgets. You don't need to hire one either. Accounting software can help you track your income and expenses and automatically create your profit and loss statements so that you are free to focus on your business and not bogged down trying to track payments and expenses manually.
Always break your process down into small steps and incremental goals. Put procedures for budgeting to find the numbers you need and know when to bill and where your money is located. Besides, it's much easier to tackle your budget and planning over time, completing a small piece of the puzzle every week.
Now That You Have a Budget, Stick to It!
Budgets only work if you stick to them. Keep reviewing your budget to make sure you are on track to meet your financial goals. While some deviation will always be necessary as you gain new insights, your budget is your road map to financial success as a small business or a freelancer.
Reviewing your budget against your performance helps you grow, scale and prosper for years to come.
Importance of Account Software to a Business Budget
Account software can have a considerable impact on your business budget and your income. By generating professional invoices integrated with popular payment systems, you significantly improve the odds of customers making swift payments and how much money you make.
Now you know how to create your first business budget: Start by determining your fixed costs, variable expenses, and revenue. Then, implement contingency plans for unexpected one-time expenses, factor in seasonal trends, and project your cash flow. Once done, you are ready to create a profit and loss statement. And, don’t forget to set goals to work towards so you can track your progress over time, too.
Lastly, avoid spending too much time manually tracking your invoices and tasks. Tools like Indy help you break down budgeting tasks, draft proposals and contracts, and manage your entire workflow from a single platform. Indy is designed especially for freelancers and small businesses that lack the time or resources to spend on multiple tools and platforms or manual account management.