If you have not already established a budget for your small business, investing a little time into creating one could pay off significantly. Establishing a budget will help you take control of your finances, preparing you for the ups and downs of running your business, as well as maximizing profits and minimizing shortfalls. A business budget will also help you keep your personal finances separate from your business finances.
Creating a small business budget offers many benefits when it comes to running your business, most importantly allowing you to maintain control over your finances and helping with financial planning. Having all of your numbers in one place will give you a clearer view of your finances and help you make decisions about how to run your business to be the most profitable it can be.
Working on your budget will help you forecast when business will be busy or slow. It will aid you in determining where you can increase profits and cut costs.
A budget also helps in developing your business strategy—determining how much you can reinvest to grow your business. It will also show you how much you can pay yourself.
A small business budget will also help you at tax time, with reporting profits and losses, as well easily identifying write-offs. It will also help in the event you decide to apply for credit cards or loans.
Not having a budget could cause you to overspend or find yourself unprepared for emergency situations. Simply put, a small business budget will help you weigh your revenue against your expenses to ensure your business is profitable.
If you are just getting started, a simple budget will suffice. It’s usually best to work on a monthly basis. If you’re new to budgeting, read on to learn how to budget for your small business and how to allocate funds in your small business budget.
If your business sells one or more products, your revenue will consist of the total sales revenue from those products. If your business offers services, your revenue will consist of the fees you take in for those services. Revenue sources might include consulting fees, freelance income, etc.
Note that revenue is not the same as income, which is the profit earned after expenses are subtracted from revenue.
Determine how much revenue your business is generating every month and try to predict that figure for the next year, accounting for busy and slow times for sales.
Next you will need to identify all of your monthly costs—including fixed expenses and variable expenses.
Fixed expenses are expenditures that recur consistently—whether monthly or annually. These are your costs that do not fluctuate, such as office rental fees or mortgage payments, utilities, insurance and taxes. If you have employees, this will include payroll.
The variable expenses are those that fluctuate throughout the year. If your small business sells products, the largest variable expense is most likely the supplies and raw materials you need to create your products. Your purchases of these likely fluctuate based on demand for your products.
Variable expenses also include shipping, printing, purchases of office supplies, etc. If travel is required for your business, those expenses are also considered variable.
If you spend money on marketing and/or advertising your business, or spend on social media campaigns, these would be considered variable expenses.
These can be harder to budget for than fixed expenses, so you will have to estimate these if you are in the early days of running your small business. Over time, patterns of these expenses will become clearer.
Inevitably, your small business will be faced with one-time expenditures. These do not fall in the previous categories, as they may pop up unexpectedly and are not expected to recur again.
These could include one-off purchases, such as a laptop computer, a printer, or new production machinery. They could also include equipment repair fees, attorney fees if you are faced with litigation, or clean up or replacement fees in the case of natural disasters.
These can obviously be harder to anticipate and budget for, which is why you ought to create a designated emergency fund, the next step in developing your budget.
To prepare for unexpected expenses or emergency situations, you should create an emergency fund in your small business budget.
While the amount is hard to predict, it’s a good idea to aim for 10 percent of your revenue and three to six months of operating expenses.
This goal might seem lofty in your startup days, but if you commit to save and put away a certain amount of money as your profits increase, you can reach that goal.
In the meantime, you could also apply for a small business credit card, a small business line of credit, or a small business loan (SBA loan), from a bank focused on small businesses, such as Live Oak Bank. This would give you access to funds should you need them quickly and if your emergency fund is not sufficient.
Once you’ve gathered all of your numbers, the easiest way to manage your budget is to use specialized software. There are several options available, such as Quickbooks, which is a good tool for small business budgeting.
If you have a small business checking account, banks such as Live Oak Bank offer the option to link your account to Quickbooks, which makes budgeting and accounting much easier.
Once your budget is established, it will aid you in your small business financial planning. With all the finances organized in your budget, you can easily examine your revenue and expenses, identifying where you can cut back and where to reinvest.
With both variable expenses and fixed expenses, you can determine how essential they are; if they aren’t necessary for doing business, these could be earmarked to cut back during lean times. You can also look for ways to cut costs of supplies and shipping by comparing suppliers and shipping carriers.
As you move forward, be sure to continue to monitor your budget, making adjustments as needed. Keep in mind that in the beginning, your budget will likely be based on estimates. As you move forward, the numbers will become more apparent, and budgeting will become easier.