How to make a small business budget in 8 simple steps
All small businesses start with a humble idea that shows promise, yet more than half of them fail within the first year, and the rest are struggling to break even for multiple years. Why is that? One of the main reasons for this is that they fail to take into consideration the pricing and cost of their product or service and underestimate the working capital needed to keep the business afloat. Sooner or later, these small businesses collapse because they fell short on one key ingredient during all the business planning sessions - budgeting.
For many business owners, budgeting is the part of business management that makes them yawn, however, it would be unwise to ignore it. Building a small business budget is a critical tool to stay realistic about your expenses, your goals, and adhering to it could be just what you need.
A business budget is a detailed plan that is carefully designed to help you keep track of your money and overall finances. The way you create a business budget is to utilize the information from your previous year and analyze market trends for your business for the next year. If budgeting for the whole year seems daunting, you can break it down into financial quarters and start from there.
If you are a new business owner, you’ll need to focus more on the market trends, cost-benefit analysis for your industry specifically. While creating a company budget, you need to create a detailed structure of the resources or funds you have to avoid any blind spots that might make you go over budget or worse, send you into debt. By having a small business budget, you’ll be able to get clear visibility on your goal, manage priorities and set spending caps on certain expenses.
A business budget is not just to put limits on your purchases. Instead, budgeting helps you to sort out your business priorities and focus on key operations that need to be done first. Between buying an aesthetic lamp for your office or getting new machinery for your business, a budget plan helps you prioritize and make smart decisions.
How would you know you are in need of funds when funds aren’t allocated to certain departments or operations for your business? A company budget helps you map out not just present but even projected values for the near future so that you can have a ballpark idea of where you might need more funds. When you present a detailed goal-oriented budget to potential investors, they are more likely to invest in your vision.
Setting a company budget can also surface certain problem areas in your day-to-day operations or departmental wastage. By noticing which certain team or activity is causing overspending, you can optimize it accordingly.
Needless to say, when you start setting small business budgets, you are also building towards growing these budgets and figuring out how to do that at the same time. Finding the weak spots or areas of improvement in your budgets can help you create a detailed goals list for the future.
With budgeting, you are taking the reins of smart financial planning back into your own hands. Budget planning helps you to put limits on certain expenses to avoid frivolous payments. By doing so, you’re not led by temptation, but by your acute fiscal intuition.
When you create a company budget, you also set down the value of money and the purpose that the money is allotted for. This leads to easier tax preparation and audits. This kind of budgeted spending helps you file your taxes faster and much more accurately and efficiently than before.
Market research is one of the most important steps to ensure you’ve created an actionable business budget. Evaluate your industry standards, learn from other companies’ budget allotments and narrow down the average of your industry. This should give you a fair idea of what kind of budget you might need to prepare.
Calculate your revenue from sales and from any other sources of income. Once you have ascertained the value, it’s time to compare the income of every month to start narrowing down the months wherein you achieved greater sales. This can even help you create a marketing plan to boost your high sales months.
Fixed costs are business costs that are static in nature and therefore are unlikely to change. For example, your insurance premiums or your rented workspace are an example of fixed costs. Since these costs are not known to change, you can already put aside the budget for these costs without worrying about overspending.
Variable expenses are those expenses that are subject to an increase or decrease depending on a number of factors. For these expenses, you must come up with an average or a ballpark number that can cover the majority of these expenses in your budget plan.
For unexpected or unforeseen expenses, you must set aside some contingency or rainy-day fund so as to lessen the impact of unpredictable expenses on your budget.
Create a tally of all your costs and review the list one more time to go over your expenses with a fine-toothed comb and find out any discrepancies or expenses that can be removed from your budget. Simultaneously, you can also prioritize these expenses in decreasing order of urgency.
Analyzing cash flow means optimizing it in such a way that a steady stream of income is maintained. That is ensured by timely payments made by the customers. To do that, you can set certain rules and regulations under place, and manage cash flow accordingly.
Creating a P&L statement is a great way to assess your revenue, expenses, and costs for a specific period of time. The Profit and Loss statement helps ascertain the financial position of the business. To formulate this statement, simply add up each month’s revenue and subtract it from monthly budget expenses. Know that while having a positive number is a great thing, some months are tougher than others and therefore are not a true indicator of your business, especially when you are just starting out.
These steps can assist you in creating a detailed budget to streamline your company’s finances. However not every budgeting software works the same way. You need a business budgeting software that seamlessly integrates with your expenses and subscriptions with a simple click of a button.
Related read - 7 effective budgeting tips for small businesses
Whether it’s a recurring expense or a one-time transaction, a business budgeting software like Volopay can help you in creating departmental budgets in real-time and set up expense policies to limit spending. For those one-off expenses, you can make a one-time budget for a specific time period. These department budgets will not reset every month and will expire once the expiration date is reached.
Alternatively, you can also create a customized recurring monthly budget. These budgets follow a cycle and will be automatically replenished at the beginning of each month. Here’s how you can use Volopay to automate your budgeting process:
You can now easily allot money to certain teams and departments for a specific time period of your choice under our Departments section. This is especially useful for small businesses where the budgets are small and with a unique purpose. Once that budget is created, you can further create virtual cards and corporate cards from the same budget, thereby saving your company’s bank account from being overutilized.
Have you ever wanted to greenlight a project but worried that your team might overspend? Now you can create budgets for a major project or even a small event such as an annual business town hall. This creates a segregated budget from which you can issue virtual cards that do not hamper the overall finances of your company, helping you stay realistic and not overspend a penny more.
What about these monthly subscriptions or office supplies and equipment that are either used by a particular department or can be used company-wide? By setting up a recurring departmental budget for these expenses you can automate your expenses to process at a specific time, helping you stay ahead of the game while being within the monthly budget.