Starting a new business requires lots of effort, and it can be stressful, especially when you don’t have a clear picture of how much you will spend on what. Setting a limit or planning your expenses will streamline your financial management.
But, how do you plan your costs before you incur them? Your small business budget is the key to estimating your expenses and considering that as a benchmark to plan further expenses for your business.
The article explains all you need to know about a small business budget, why it is essential for your business, and a six-step guide that will help you create your business budget efficiently.
So, let’s begin with understanding the business budget.
What is a Business Budget?
Your business budget is est the income you will generate and the expenses you will incur for the next financial year. It considers how much you have spent in the past year or months and how much you will need to spend in the coming months to generate revenue.
However, you won't have historical data if you have just started your new business. Hence, you have to estimate your expenses based on how much revenue you are targeting for the next financial year and how much costs you will need to incur to generate the revenue.
So, why do you need a business budget? Let’s understand its importance and see why you should have a small business budget.
Why is Small Business Budget Important?
- Helps in business planning: Your business budget will help you in your business planning and streamline your business finances more effectively.
- Helps in estimating profits or losses: It will also help you understand how much revenue you will generate and how much expenditures you have to make. Based on the predictions, you will know whether you will make a profit or loss in that financial year.
- Effective decision-making: The budget will also serve your purpose of making better decisions as you will have an estimate of how much you will spend and earn, so you will be in a better place to make business decisions.
- Raise funds: A substantial business budget will also help raise funds since you must show future financial roadmaps to potential investors.
Hence, be it your business planning or raising funds, your business budget will gauge you a fair idea of the financial health of your business.
Let’s understand the comprehensive guide on creating a budget in six simple steps.
6 Steps to Creating a Powerful Budget for Small Businesses
Although creating a small business budget is not rocket science, you must estimate your expenses carefully and predict your revenue.
The business budget becomes challenging when you prepare your budget for the first time with no past figures. Below is a six-step guide that will help you prepare your small business budget, whether you are preparing it for the first time or not.
Calculate and List Your Revenue
To prepare a budget, you should start with the income side of the income statement, and you need to estimate your revenue for the next financial year. If you are selling multiple products or providing services, you need to list how much income you will generate from each product and service.
For example, suppose you expect to sell 10,000 units of wooden chairs in a year. In that case, you can consider the total revenue of the 10,000 chairs for the next financial year as revenue before deducting any expenses from the income.
Because if you deduct expenses from the income, it will give you profit or loss; hence, you are required to consider only total business revenue from various sources.
Club Your Fixed Costs Together
Your fixed costs remain fixed no matter how much revenue you generate or how many products you sell. These expenses are predictable and include annual rental expenses, loan repayment amount, depreciation costs, insurance expenses, etc.
To estimate your fixed costs for your business budget, you need to list all fixed costs that you will incur in the next financial year. Different businesses will have different types of fixed costs; for example, if you are in the manufacturing business, your fixed costs will include the following costs:
- Factory rent
- Direct wages
- Direct material costs
- Factory electricity
- Depreciation of the plant and machinery
- Factory insurance
Thus, it would help if you considered fixed costs applicable to your business as it varies depending on your industry.
Add Variable Costs
Your business will have many variable costs, which are not fixed. The variable costs are those expenses that will differ depending on how many units you produce or how your business performs.
For example, the fuel expense of your business vehicle is a variable cost because it will vary depending upon its usage. Thus, these are the costs that change every month.
You need to add your variable business costs to your fixed costs to estimate total expenses for your business.Try to lower your variable expenses to make a better net profit margin since your fixed costs can’t be changed.
Predict any Contingent or One-Time Expense
Your one-time expenses may include buying an office or machinery for your business. The contingent expenses are those that you are unsure of their occurrence. These expenses may incur due to the occurrence or non-occurrence of an event.
For example, you expected your machinery maintenance costs would be $900, but you had extremely high costs on machinery ($2000) as you faced a machinery breakdown that year.
Now, you can not predict such expenses but must prepare certain funds to meet costs during unexceptional circumstances.
Create Your Profit and Loss Statement
Once you have gathered all your business revenue, fixed costs, and variable costs, including contingent expenses, you need to prepare a profit and loss statement that will help you understand how much profit or loss you will make in the next financial year.
You need to add all incomes and deduct all costs from your estimated income. You may have a positive or negative amount as a result. If you get a positive amount, you will make a profit per your business budget.
And, if you get a negative amount, your budgeted revenue and costs will incur a loss for you. Moreover, you can’t stick to your budget 100%, but it will give you an idea of whether you are going in the right direction or not.
Prepare a Business Budget
That’s it. Now you are ready with your business budget. You just need to prepare a budget table, as shown in the example below, and you will have your small business budget ready to help you plan your business activities more efficiently.
Business Budget Template
Particulars Amount (in USD $) Income: Sales of Product A $6,000 Sales of Product B $9,500 Other Income $2,300 Total Income (A) $17,800 Expenses: Fixed Costs
$350 Total Fixed Costs $5,850 Variable Expenses
- Marketing Expenses
- Utility Expenses
- Transportation Costs
$250 Total Variable Costs $1,280 One-time Expenses
- Office Purchase
- Office Furniture
$1,800 Total One-time Costs $6,800 Total Expenses (B) $13,930 Estimated Net Income (A) - (B) $3,870
Thus, the template shows how much this business will make revenue from the sales of products A and B and how much fixed, variable, and one-time expenses this business will incur.
Stay on Top of Your Business Budgeting
Thus, creating a small business budget may seem stressful when you have a lot of other work to focus on. However, with the right approach, you can make your business budget efficient and make it work for your business planning and better decision-making.
Automate preparing your small business budget with Upmterics, where you will get customized business budget templates to suit your industry. The financial forecasting and business planning software can do all the business finance management for you.