Running your own small business often represents a long-held dream. But a business is still a business — and that means your dream should include making money. Along with your blood, sweat and tears, making sure your business is financially successful takes a lot of planning and number crunching. A business budget combines both, and it’s one of the most important tools you can use as a small business owner.
Why Budgets Are Important
Your business budget literally shows you the money — the amount the business has on hand, its expenses and what it’s bringing in. An effective budget accurately records the business’ inflows and outflows of cash in the past and in the present, and it helps you plan how to shape those cash flows for the future.
Besides its essential role in your business planning and operations, your budget can also be of interest to potential investors or financial institutions when you are applying for funding.
Create a Business Budget: Getting Started
When you create a budget, you express in numbers how you want your business to perform in the future. So it’s important to know what your goals are for the business — and to do the research necessary to make sure those goals are realistic. As time goes on, you can see how the actual numbers match up with your targets and use this data to plan for the future.
Keep in mind that a budget is generally an educated guess. Your inflows and outflows will rarely match up exactly with your projections, and that’s OK. The key is to get as close as you can using the most relevant and accurate data available.
You can create a budget on your own, with the help of an accountant, using financial software or utilizing spreadsheet templates, depending on the complexity of your business and your comfort level. Whatever form your budget takes should make sense for you and the unique needs of your business.
Short-Range and Long-Range Business Budgets
The main financial budget you’ll be working with should cover a whole year, usually divided into months. Most budgets will need to be adjusted throughout the year as data comes in.
You may also want to create a cash-flow budget to help you keep track of cash on hand. This will be fairly short-term, updated on a daily to monthly basis.
A long-range budget will cover at least three years (and perhaps up to five), and it is divided into quarters or even years. The short-term budget can be used to update this as needed.
Creating a Business Budget: What to Include
Your budget will include a number of components that together show how much money is coming into the business, how much is going out and what is left over.
Revenues are all the money that comes into a company. This can consist of sales (the money your company earns from customers through the sale of goods or services) or other sources of income, including:
- Payments from trademarks and patents
- Sale of property
- Rental of real estate or property
For your budget, it’s crucial to estimate your revenues as accurately as you can. This can be tricky, especially when forecasting sales. Use the previous year’s sales as a guide, or if you are a new business, make sure to do your research so you have a realistic idea of how much you’ll be able to bring in. When in doubt, it’s best to err on the conservative side in your revenue projections.
Your revenues will determine the numbers for the rest of your budget: Your planned expenses will have to be less than what you bring in, and the difference between your revenues and expenses will determine your profit.
It’s important to try to be as accurate as you can when planning your spending, but it’s also wise to build some slack into your budget in case expenses are higher than you anticipate. You can divide your costs into different categories:
- Fixed costs are expenses that are always the same amount, including items such as rent, insurance, internet service, etc.
- Variable costs are usually core business spending, such as inventory, raw materials and freight. These costs will increase or decrease depending on your sales.
- Semi-variable costs are fixed costs, such as utilities, telecommunications and salaries, that may fluctuate depending on the needs of the business.
- One-time expenses, such as the purchase of equipment, should also be included in your budget.
Don’t forget to include business income taxes in your costs! Your revenue and expense projections can help you estimate how much you should owe in taxes.
Profits are what is left over when you subtract your costs from your revenues. More than that, they are the reason you have a business in the first place. Knowing how much profit you want to make is a crucial step in the budget planning process. Different industries typically have different profit margins, so, again, do your homework to find out what profit levels are realistic for your business.
Since profits are a combination of revenues and expenses, either can be adjusted to reach your profit goals. This might mean ramping up sales or cutting costs (or both) to get your profits where you want them.
You also need to think about what you want to do with your profits. Will you pay yourself, invest in the business, save or reward employees? This should also be reflected in your budget.
Cash flow measures the financial inflows and outflows of your business within a certain period of time. It’s a measure of how much cash you have on hand at any given time.
Cash flow planning can actually make or break your business, quite simply because you need cash to run your company. If you’ve got salaries to pay and inventory to buy, you always need enough cash on hand to do that.
Cash flow planning is all about timing. It measures whether the revenues coming in over the period of a week, month, or quarter is enough to pay for all the expenses you will have during that time.
Many small businesses must pay in cash but get paid on credit, which can cause cash flow problems when they have immediate expenses and must to wait to get paid themselves. The cash flow budget can show in advance where these problem areas might occur, giving you time to find a solution first.
Your cash flow budget will usually be separate from your main financial budget, but they will be closely linked. Cash flow budgets can be daily, weekly or monthly depending on the needs of your business.
Business Budgeting: Fail to Plan or Plan to Fail
A budget is an indispensable tool for any small business. It maps out in detail the direction of the business and all financial transactions that go into its operation.
When prepared correctly, your budget allows you to set lofty goals, see the reality of your business, learn from any mistakes and adjust accordingly. A successful budget is a crucial part of a successful business!
We're working on some pretty cool new pieces of content, including tools that will give you insight into your business finances.
Want to be the first to know when they launch?