One of the most central mantras of business is that planning is everything. From tracking analytics to setting up marketing strategies, having a well-thought-out plan can be the difference between failure and success.
The same goes for drawing up a business budget. Making sure you have a well-planned budget will help you track your cash on hand, expenses, and revenue to keep your organization successful. If you don’t set up a clear budget, you run the risk of not knowing how well your business is doing – which means you can be taken by surprise if something goes wrong.
Here are some tips on how to budget for your business.
What Should It Look Like?
Before you open your business, you should create your budget in a spreadsheet to help you visualize revenues and expenses. Pay attention to raw material allocations, especially when you’re starting out a new fiscal year – ArtCraft Pottery, for instance, allocates 10% of the following quarter’s production needs in ending inventory.
The budget should be tabulated at least yearly. Divide up your yearly budget into 12 months, and have blank columns next to your estimates to fill in with your actual expenses and gains throughout the year. This way, you can have a better idea of what to estimate for the following year. You may also want to look into business budget templates to help you visualize what your own plan should look like.
What Should You Include?
This is probably the most important part; about half of all businesses don’t survive past 5 years, but setting up your budget with all necessary components will go a long way towards ensuring your company’s survival and success.
In general, your budget should include your revenues, expenses, and profits. This way, you’ll be able to see if you have any resources left for improving the business. More specifically, your business budget should include the following:
Your sales and revenues make up the largest component of your budget. Think about how much money you bring in monthly – you can start with your sales figures, and then add other income sources. Make sure your estimates are as accurate as possible, but when in doubt, estimate on the lower end of the spectrum; it’s better to have more money than you expected than less.
You can also take into account your credit when setting this section up. Luckily, there are a lot of online resources to help with this. For instance, CreditRepair.com answers “What are the names of the three credit bureaus?” for business and personal finance.
Once you set up your revenue expectations, you should figure out how much it will cost to earn those revenues in the first place. Fixed costs remain the same every year, like rent and insurance. Variable costs will change based on your sales; these include costs like raw materials and inventory. You can scale these purchases up or down using your monthly profit. Finally, semi-variable costs are fixed costs that can change based on how well you’re doing; these include salaries, product testing, and advertising.
This tends to be the most interesting and important part of a budget for business owners. To get this estimate, subtract your expenses from your revenues. It’s generally recommended that you take a look at what appropriate profits for your business are to help you plan out future purchases, bonuses, and organizational improvements. This is also a good chance to identify potential problems to ensure you can meet issues head-on.
What Are Some Extras?
The aforementioned components are all you really need to set up a basic business budget, but it’s a good idea to add in some extra aspects to help fully flesh it out.
For instance, before you start your budget, you may want to research the industry by going to the library, talking to other business owners in your area, and checking the IRS website. These can all provide you with helpful information on what your revenue, cost, and profit estimates should look like to help you be more accurate. You can also find pretty specific information just by searching online – the average net profits of a small manufacturing wood products business with $2 million in revenue annually, for example, is 14.56% per year.
You should also consider figuring out your one-time purchases beforehand to avoid any nasty surprises. Although many business owners just accept that one-time purchases can be factored in later, it’s always a good idea to figure out what they may be. For example, you might need to replace a broken computer, go on an unexpected trip to a conference, or promote an employee you want to hold onto.
There are fewer things more important to building a self-made business than planning out a budget. By making sure you have all necessary components and taking some extra steps, you can make sure that no financial surprises will come your way.
What are some other tips you have for creating a great business budget?