How to create a successful business budget

Small businesses face numerous challenges daily, especially when first starting. The demands of daily tasks make it difficult to create and adhere to the structure and patterns of the business. At first, everyone is running everywhere, putting one fire out after another. Owners are confronted with scores of tasks, many of which they have never performed before. It does not seem very easy to maintain control while running in so many different directions. It is vital to understand that one of the main components of a company is the finances, and it must be looked after with much care. At some point – preferably before the business is up and running – you must create a budget. Creating and living by it is one of the most important tasks you can perform as a business owner.

Ideally, before you start a business, you should have a business plan which includes a budget; most of the time, that is not the case. A budget is a planning tool that will assist you in building a framework for your business. It also can help with goal setting and establishing priorities. While many business owners dread the idea, this post will explain the importance and how to set up a budget successfully.

Why you need a budget?

When your sales keep increasing, and you have a significant amount of profit, creating a budget might not be your priority, but it has many benefits. A budget is, above all, a planning tool. It will help allocate capital, pinpoint unnecessary expenses, and anticipate low and high season revenues. Additionally, it is a guideline and a great way to measure performance while minimizing business risk.  

For instance, before you sign a new lease or invest in equipment, you need to consult your budget to ensure you can follow through with your plans. According to the SBA, a budget can be used for the following:

• Funds for labor and materials
• Plan for future expansion
• Make a profit
• Economize when you need

Planning

The vast majority of businesses experience seasonal fluctuation; some more than others. An effective budget will help you to understand when those swings take place. Comprehending such data is essential for planning a winning strategy for your company.

In essence, a budget helps identify the main source of income, the most and least profitable months, and pinpoint all expenses throughout the year. With that information in hand, it is much easier to plan ahead.

For my business, we service apartments, and one of my goals is to offer carpet cleaning. A steam cleaning van is a considerable investment requiring an initial large sum of money. On my budget, I allocated a monthly amount for growth, and within a year I will have the capital needed for that investment. Hence, I can start making arrangements, talking to my clients, and working deals and a price list to launch a new service by January 2021.

Evaluation

Beyond planning, a budget can be used as an evaluation tool. It will assist you in tracking your revenue and expenses while comparing them to what you have planned. This practice ensures that your business is on track, and can also help identify problems and opportunities.

Tracking sales and expenses allows you to evaluate the efficiency of your prices. Additionally, it keeps a track record over the years helping you identify when a season is not as busy as it used to be. It also helps to monitor the profitability of new products.

1. Gather Income Sources

The first component of a successful business is income. Figure out how much money you are going to bring on a monthly basis throughout the year. Divide your services, or products into four major categories, and create a forecast of how much each element will bring for every month.

For those with a running business, you can use numbers from previous years as a base for your forecast. The Profit & Loss report provides all the information needed. Keep in mind that the Profit & Loss report is one set, and does not break it down by month. I have used a sales report and an expense report, and combine those into one.

If you are just starting this business, you are somewhat familiar with the ins and outs of the industry and should have enough knowledge to come up with a forecast. If you are still unsure, you can start with your expenses and predict sales to be higher than expenses (not the best way to do it).

2. Fixed Costs

Fixed costs are expenses that are consistent, and don’t fluctuate on a monthly basis. For instance, rent, car payment, phone payment, etc. If you do not know exactly, pull a bank statement or a report from your accounting software to determine your fixed costs.

List all of your fixed costs and label them properly on your budget.

3. Variable Expenses

Items that are not the same every month are labeled variable expenses. These are the expenses that either scaled up or down, depending on the state of the business. Utilities, supplies, postage, office supplies, etc. are a variable expense. Usually, these overheads fluctuate with how busy you are for the month. Hence, when working with your sales forecast, keep in mind that these expenses will increase accordingly.

4. Account for Special Circumstances Spending

In my first year of business, my partner and I took a business road trip to Kentucky using the company’s only pick-up truck. During our short visit, the transmission of our vehicle went out. It was unexpected, and it cost our new business over $1,500 to get it fixed. Not counting another night at the hotel, and more eating out. All and all, the trip cost us substantially more than expected.

At times, there is no way to predict the unexpected. However, when building a budget you should account for emergencies, unexpected circumstances, one-time spending. I always account for a large chunk of capital for pay for the accountant during tax season.

5. Combine All Items

In this step of your business budget, all you have to do is put all together. Here is a sample list of everything that you might need to be included:

Income:

• Service or sales
• Investment income
• Rental income
• Savings
• Other income

Fixed Costs

• Rent/Mortgage
• Salaries
• Government or bank fee
• Cell phones
• Loans payment
• Website hosting
• Insurance

Variable Costs

• Materials
• Contractor wages
• Commission
• Marketing
• Fuel/ transport
• Travel
• Utilities
• Legal Services
• Accounting services

Special circumstances

• Computer
• Furniture
• Emergency
• Software
• Gifts

Conclusion

Whether you are starting a business, or you have been at it for some time now, a budget is an essential tool. Regardless of your industry, building an effective budget is necessary for planning and health evaluation of your company. If you ever expect to grow your business a budget will create guidelines that will assist you to reach your goal. This post covers with details each step you must take to build a perfect budget.

When comes to tools to grow your company, what do you think is the most important factor?