How to Create A Small Business Budget in 4 Easy Steps
Business budgeting can feel like a jigsaw puzzle. There are taxes to pay, insurance to cover, and revenue forecasting to calculate. And when you don’t have a plan for how to spend your money, you might find your bank account empty when you have a bill to pay.
That’s why a small business budget is crucial for any entrepreneur. It estimates your future expenses and revenue to see if you’re hitting your goals. These estimates help you spend money wisely, by giving each dollar a job and confirming your expenses are covered.
The key is to make a smart financial plan and then compare your actual spending and revenue to that plan. Here’s how.
What Is a Business Budget?
Budgets are a plan for how to spend money. They’re usually organized by spending category. For a business, those categories might be “Employee wages,” “Materials,” and “Taxes.” Some of these costs might be fixed, like monthly rent or mortgage payments. Others might be varied, like employees paid hourly or usage-based utility bills.
Businesses might have several budgets, whether that’s by department or over different time periods. A small business, for example, might create a yearly budget for the whole company. But a larger operation might have quarterly budgets for each department that need constant review.
Using a budget effectively requires that you track all money you earn and spend, so you should also plan for money coming in. It will be the revenue you expect to earn and payments you know you’ll collect that month.
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How Do You Create a Business Budget?
Knowing what a budget is in business is just the first step to creating one. Here are four steps you must take:
1. Calculate Your Revenue
The first step is determining how much money you’ll have coming in. To do that, you’ll need to do some revenue forecasting. This means making educated guesses about how much money your company will earn during the period your budget covers.
Use your company’s past performance to help you guess how much revenue you’ll likely earn. If you’re just starting out, research how much competitors make to project your future revenue.
RELATED ARTICLE — Revenue Forecasting: Step-By-Step Guide
2. Add up Your Fixed Costs
Next, your budget must include expenses. You want your total expenses to be lower than your total revenue to stay profitable.
Start by adding up fixed costs. They include things like regular payments for equipment or debt. Be sure to include any small business fees you pay regularly, such as credit card processing fees.
3. Determine Variable Costs
Estimate your variable expenses. These are costs that change regularly—often from week to week or month to month. Examples include utilities, billable labor, or commissions you pay your workers.
Because they vary, it helps to find the average. If you can, go back over several payments, like your last 3-6 utility bills. You can then have an educated guess to what the final cost will be.
4. Subtract Your Fixed and Variable Costs
Finally, subtract your expenses from your revenue. If expenses are more than your revenue, you’d be operating at a loss.
After doing this math, you can see how much money you have left to invest in your company’s growth.
What Are the Benefits of Creating a Business Budget?
Once you’ve learned how to create a business budget, you can start reaping the many benefits of this financial planning. Here are some of the biggest advantages:
- Maximize Efficiency. A budget gives you insight into how you’re actually spending your money. This can help you make better business decisions. For example, simple things like switching Internet providers and canceling unused subscriptions can save a lot of money.
- Establish a Financial Plan. If your company has long-term objectives, you can save for those goals by adding a fixed expense to your budget.
- Reinvest Leftover Funds. Your budget shows what’s left over after expenses, so you’ll get a clearer idea of how much money you have to reinvest or spend on upgrades.
- Predict Slow Months. When you make your budget, you can target if your revenue will be lower during certain periods. This helps you better plan ahead to avoid going into debt to continue operating.
RELATED ARTICLE — The Top Financial KPIs To Monitor for Your Business
What Are the Different Types of Business Budgets?
It’s a good idea to create different types of budgets for your business to know more about your finances. Here are some common budget types:
1. Master Budget
A master budget looks at the big picture. It pulls in information from various sources, including financial statements, revenue forecasts, company mission statements, or business plans.
This budget will contain every detail about your financial picture needed to make a clear plan for success.
2. Operating Budget
Make an operating budget to see how your planned revenue and expenses compare. This functions similarly to a profit and loss statement, except you’re making future projections rather than looking at what happened in the past.
Include fixed, variable, and non-operating costs in your operating budget. See how much money you’ve planned to spend and earn, and make sure your projections are realistic. If not, tweak your budget.
At the end of the period, compare your actual operating costs to it to see if your plans were on target. This helps you create more realistic budgets in the future.
RELATED ARTICLE — Profit and Loss Statement: How To Create and Read a P&L
3. Capital Budget
Make a capital budget if you’re saving for a big business expense, such as new equipment. Including details about large purchases you plan to make helps determine how those purchases affect cash flow and whether they’re actually affordable.
4. Cash Budget or Cash Flow Budget
This budget aims to estimate how much cash will flow in and out of your business, where it will come from, and where it will go. Make these projections with information from sales forecasts and past production or output.
RELATED ARTICLE — How To Calculate Cash Flow: Key Formulas and Practical Examples
5. Labor Budget
A labor budget is a plan for how much hiring and paying employees will cost you. Include regular employees, seasonal workers, and temporary or part-time staff.
8 Tips for Managing Your Small Business Finances
Successful business budgeting ensures you make the most of the money your company works hard to earn.
Here are eight other tips to better manage your company’s finances:
1. Separate Business and Personal Finances
If you’re a solopreneur or new to running a small business, separating business and personal expenses is very important. It’s vital for tax purposes.
Plus, it lets you see how your business is actually performing. If you mix up your money and the company’s money, it’s much harder to know how much revenue is earned and whether your business expenses are on budget.
2. Pay Yourself Regularly
Treat yourself as you’d treat any employee of your company. Set up a regular payment schedule so you have a reliable income. You’ll know to track your labor as a company expense, and it will help you keep a personal budget.
3. Understand Your Business’s Financial Documents
Your company may produce many financial statements. You must understand these important documents, like a profit and loss statement or expense report.
If you’re unsure what some of these documents represent, consider hiring a financial professional. Meeting with an accountant or financial advisor just a few times can teach you a lot about how to run a business.
4. Choose an Accounting Method
Choose between an accrual or cash-based accounting method.
Using the cash-based approach, you’ll track money as it comes in or out since this method tracks cash activity. If you choose an accrual-based accounting method, you’ll track revenue as you earn it and expenses as you incur them, even if you don’t actually receive or spend the cash.
RELATED ARTICLE — Accrual Basis Accounting: Definition and How It Works
5. Build Your Business Credit Score
Companies have credit scores, just like individuals. If your company earns a good credit score, it can borrow and get other perks like cheaper utility deposits. Borrow in your company’s name and be responsible with debt to earn a good business credit score.
6. Plan for and Pay Business Taxes
Businesses have more complicated tax obligations than individuals. You may have to collect employee payroll taxes and sales taxes, depending on your business structure. The U.S. is a pay-as-you-earn tax system, so you may need to send money to the IRS multiple times throughout the year.
If you use a small business budget template, it should have a section for taxes to make sure you’re deducting enough from each payment.
RELATED ARTICLE — Filing Business Taxes for LLC for the First Time: Everything You Need To Know
7. Use Small Business Financing Wisely
If you borrow, use these loaned funds wisely. Ideally, they’ll help you grow your revenue or reduce expenses. Otherwise, you may not be able to make debt payments or turn a profit after paying creditors. This could make it a lot harder to maintain profitability.
8. Set Healthy Billing Practices
Keep track of invoices and payments and create an effective collection system. This ensures your company has enough cash flow to operate.
Some ways to ensure you get paid include having clients sign contracts, setting clear payment terms, including deadlines, and charging late fees if people don’t pay on time.
Make Tracking Business Expenses Easy
An accurate account of your expenses is a key part of your business budget. Fortunately, tracking expenses has never been easier.
Invoice Simple’s business expense and receipt tracker lets you scan any receipt and capture key info automatically. All your expense data is ready to export into a summary report whenever you need it. Try it today so you can start tracking expenses the easy way in order to make budgeting simpler.
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