Your business needs a budget but when you’re 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’ll need to work with estimates if this is the case, but it will still make financial planning much easier. Once you’ve laid out a realistic budget, you’ll be able to adjust it as necessary rather than starting from scratch. Here are six easy steps to creating a realistic budget for your business.
1. Calculate Your Income
Business income is the money you receive from customers for your goods or services. This is easy to work out from your records if you’ve been in business for a while, but if you’re just starting out you’ll need to make an estimate. Try to be as realistic as possible but if in doubt, always err on the side of caution. It’s better to be conservative with your budget than risk overspending.
If you’ve been in business for a year or more, take some time to analyse seasonal trends. If you’re new, do some research on patterns within your industry. Many businesses experience a boom in sales at Christmas, followed by a lull in January. It’s important to plan for these peaks and troughs as accurately as you can.
2. Determine Your Costs
Once you’ve worked out your projected income, it’s time to take a 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’re most likely to have to tweak over time. You can calculate this by adding together all of your variable costs over a given period of time 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’ll need to replace it as soon as possible so that it doesn’t impede productivity. Of course, some one-off expenses are planned, such as facility upgrades or conferences. Keep a separate fund for this type of cost and don’t be tempted to put it towards your regular expenses.
4. Work Out Your Profit
Your profit represents how much money you’re actually making. You could have a huge income, but that doesn’t mean much if it’s outweighed by even larger costs. To calculate your profit, subtract your costs from your income.
A budget doesn’t mean much if you don’t review it regularly, and a lot can change in a surprisingly short amount of time. It’s vital to keep checking your budget and making adjustments 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’ve 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’ll have 24/7 access to your records from anywhere in the world, so long as there’s an internet connection.
The Importance of Budgeting
A realistic budget for your business makes it so much easier to plan for the future. 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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