Small businesses looking to grow need a business budget. Creating a budget doesn’t just make it easier to understand and control cash flow, it can help you fund future plans by answering important questions like:
- How much your business spends on fixed expenses
- How much revenue you’ll need to hire more employees
- When the right time is to invest in new opportunities
The start of a new year is a great time for small business owners to do the necessary planning to create a meaningful budget.
So, let’s dive in and get started!
What is a business budget?
A business budget is a detailed plan outlining your expected revenue and expenses over a period of time. While different types of budgets exist, most are prepared on a quarterly or annual basis and broken down by month.
Monitoring your business plan and financial performance with the help of a budget is vital to running a business because it ensures that you’ll:
- Continue to meet current financial commitments. If you lose a big client or contract, your budget will show which expenses you might cut to reduce costs.
- Make the right decisions regarding future costs and objectives. If a project with a large, upfront expense is kicking off in October, your budget might suggest you start saving in April to ensure sufficient funds are available.
- Plan adequately for revenue fluctuations and seasonality. If you own a ski resort, you can better manage the seasonal ups and downs of your budget year by setting aside income when you’re fully operational to cover off-season expenses.
It’s worth noting that your budget is NOT a forecast. While a forecast predicts future financial outcomes, a budget helps your business plan around those outcomes based on what you want to achieve.
Budgeting as a collaborative process
If yours is a growing business with multiple departments, you may find it easier to plan company-wide expenses by splitting your budget into divisions, and having department managers provide the estimates for:
- Sales targets
- Marketing expenses
- Production costs
You should also ensure everyone is aware of approved budget amounts, what department funds can be used for, and the difference between amounts allocated to each department versus the approval of specific expenses.
Why it’s important to create a budget for your business
Creating a budget will help you understand how much money you have right now, how much you’ll need to spend in the coming months, and how much you require to meet specific objectives.
For start-ups, a budget clarifies:
- Start-up costs
- The amount of funding needed to kickstart the business
- The revenue that must be generated to keep the business afloat
For business owners, a budget clarifies:
- Where to concentrate resources for business growth
- Which areas can be tweaked to reduce costs
- The revenue that must be generated to reach business goals
Creating a budget will help you identify financial problems before they occur so you can take steps to prevent them. Many lenders and funders require a business budget, in fact, when you apply for a loan or a grant.
A budget is also essential for:
- Minimizing risk
- Managing your overall expenditures
- Tracking your business performance
Before committing to expensive machinery or a business lease, for example, creating a budget will confirm whether you can afford to take on such expenses.
Comparing budgeted amounts with actual amounts throughout the year, meanwhile, will show whether your business has fared better or worse than expected.
What to include in your budget
Let’s take a look at the three main components of a typical business budget template.
Sample Business Budget
Estimated revenue is the income you expect to generate from selling your goods or services.
- If you’re a start-up with no historical data, you can use industry averages to develop sales targets
- If you’re an established business, you can use the previous year’s data in your accounting software, along with anticipated growth, to develop sales targets
Remember – this is an estimate only. Your actual projected sales will always be different from your budgeted amounts.
Fixed and variable costs
Fixed costs are expenses that do not fluctuate with your sales volume.
- Bank fees
- Employee payroll
- Equipment leases and software subscriptions
- Outsourced accounting services
Variable costs are expenses that do fluctuate with your sales volume (or costs of goods sold).
- Raw materials and inventory
- Packaging and shipping
- Sales commission and contractor fees
- Discretionary expenditures like marketing and advertising
- One-off capital costs not incurred on a regular basis (think computer purchases, factory expansions, research and development costs)
It’s important to be thorough by including accurate estimates for all your expenses. Try contacting your suppliers for quotes, or examining your historical numbers for the most precise figures.
The difference between your estimated income and expenses is your profit, which - in an ideal scenario - should be growing. If your margins aren’t where you want them, you may have to raise prices or reduce expenses, then adjust your estimated revenue and costs to reach your target profit margins.
Once complete, you should review your budget regularly and make revisions as needed. Comparing your budget amounts with your actual financials is important for two reasons:
1. If your budget is tied to a cash flow forecast (to preserve funds for an upcoming building renovation, for example), but you don’t monitor it, overspending of allocated amounts could delay your project.
2. Examining over- or underspending in a period can reveal important information when budget assumptions turn out to be wrong. If you expected to spend X dollars in one area, for example, but spent a lot more, you might discover you’ve been billed incorrectly.
Overall, it’s best to create a conservative business budget by underestimating your revenue and overestimating your costs.
Bookkeeping: The key to a meaningful budget
Your books provide the actual numbers for comparing against budgeted numbers. You need accurate bookkeeping to create a meaningful business budget because:
- Reliable historical data is essential for estimating sales and costs
- Regularly comparing your budget with your actual financials is the best way to identify looming cashflow problems or cost reduction opportunities
Working closely with your bookkeeper or accountant will ensure you create a realistic budget. Contact Enkel today and find out how accurate, stress-free bookkeeping services can bring financial clarity to your business.