When a business has a prepared budget for the future, it has a foundation to compare its performance. The role of the budget as a managerial decision-making tool is unquestionable. Before we get into how to create a small business budget, it is important to answer why a business needs a budget. If you would like a professional consultant to help your business budget, click here to schedule an appointment with our team. If you are making a budget for a new business, you are building pro forma financial statements. Pro forma financials are a very special type of financial projection, so check out our article that discusses those special needs.
Inventory and materials may fluctuate based on sales or market needs. You will want to look at your variable costs for 3-6 months if possible to get a feel for averages and patterns. While you might spend a lot on office supplies one month, you may not need any for the rest of the quarter, and can begin to plan for that expense. Fixed costs are the bills and expenses that you pay every month (or year) that are typically the same amount. Fixed costs are relatively easy to identify and plan for, though you may be able to negotiate or shop around for lower monthly totals. Include your due dates for reference, since the timing of payments can affect your cash flow.
Ways to Spend Your Marketing Budget Next Quarter
If you don’t keep an eye on your taxes, your business will fail. How much you’ll owe depends on how much you make, but a good rule of thumb is to set aside 25% of your net profit for taxes. You might even want to create a separate bank account to stash your tax money just to make sure you don’t overspend.
Let’s take a closer look at how to create a business budget and discuss the benefits of budgeting. You will even find some helpful resources and a business budget template we hope you can leverage moving forward. With the right tools and processes, you can use business budgeting to your advantage.
A few thousand dollars upfront could save you thousands more in legal fees and inefficiencies later on. In your spreadsheet, create a summary page with a row for each of the budget categories above. Then, next to each category, list the total amount you’ve budgeted. Finally, create another column to the right—when the time period ends, use it to record the actual amounts spent in each category. This gives you a snapshot of your budget that’s easy to find without diving into layers of crowded spreadsheets.
Other Miscellaneous Costs
Make sure you’re collecting accurate data points whenever you’re dealing with your business’s finances. A simple mathematical error or typo can lead to confusion or, worse, uninformed financial decisions. Your business budget can present a view of your financial health, including where you’re spending money and where you might benefit from cutting back. With better foresight, you can cultivate stronger business performance and improve earnings from the last quarter or the last year. Fixed costs are important to manage because this is an opportunity for you to minimize your fixed costs by proper planning. Other fixed costs could include payrolls, utility bills, etc.
If you don’t have a physical product, focus on projected sales, revenue, salaries, and consultant costs. Figures in these industries—whether accounting, legal services, creative, or insurance—can vary greatly, which means budgets need flexibility. These figures are reliant on the number of people required to provide the service, the cost of their time, and fluctuating customer demand. Just like any budget, forecasting is a process that evolves. So start with what you know, and if you don’t know something—like what kind of unexpected costs might pop up next quarter—just give it your best guess.
Without a budget, these may go unpaid and lead to avoidable issues. Once you’re truly ready to create your budget, you’re ready for step two. This step is where most people falter when they’re creating a budget, but it’s the most crucial step. Make or download a budget template and plug all of your information in. The real advantage of setting a budget is that it helps you make strategic business decisions.
What does a business budget consist of?
Sum all your fixed costs because they’ll be present irrespective of your sales and variable costs. The first thing you’ll do in your budgeting process is gathering all your business’s income sources. Consolidate them to have an estimate of total revenues for the next financial period. Putting in the work to create your budget may seem like a hassle. But while it takes a bit of time and energy, it’s worth the extra effort. Thorough business budgeting gives you the financial insights you need to make the right decisions for your business to grow, scale, and prosper in the future.
Then, we’ll outline the six necessary steps towards business budget creation. Fixed costs are any expenses that remain constant over time and don’t dramatically vary from week to week or month to month. In many cases, those expenses are locked in by some form of contract, making it easy to anticipate and account for them. This category usually includes expenses related to overhead, such as rent payments and utilities. Phone, data, and software subscriptions can also fall into this category, along with debt payments.
To do your best to ensure timely customer payments, it’s important to have flexible payment terms and the ability to receive payments through common payment channels. Unfortunately you will need to deal with customers who might not comply to the stated terms. How to create a business budget This might affect your cash flow forecast due to missing payments. Your previous year’s revenue figures can act as a reference point for the upcoming year. This will help you set realistic goals for your team, leading to the eventual growth of your business.
Step 4: Include one-time and unexpected costs
Suppose your business made a revenue $5,000,000 and yet there are debts to be paid. At the end of the year, your expenses are more than your revenue, which is not a good sign for a growing business. This tells you that you must identify the expenses that are not benefiting the business in any way and eliminate them.
Not every accounting software application offers budgeting capability, but the following small business accounting software applications do. When budgeting, just assume that your business will have at least one major unexpected expense during the year. Planning for growth is important when calculating budget revenue, but you’ll have to account for added expenses as well.
The positive cash flow signifies excess cash and negative cash flows show cash shortage. Estimating your cash flows is important in creating a small business budget because cash is the lifeblood of every business. This is the hardest step in creating a business budget and, thus, where owners benefit most from the help of a financial professional. A professional can interview your team, understand their vision, and interpret it into numbers on a spreadsheet. Many companies, big and small, rely on Intuit’s services like Quickbooks and TurboTax. Even if you don’t use the company’s paid financial services, you can take advantage of Intuit’s free budget template, which works in Google Sheets or Excel.
- Do you plan on increasing your customer base each year by 5%?
- Reviewing your bank statements and bookkeeping reports will make this process easier, but it can be time-consuming to calculate averages for each item.
- With all this information at your fingertips, you’re ready to start setting a budget.
- During profitable months when there’s extra income, however, you may increase your spending on variable expenses for the long-term benefit of your business.
But getting them to nail down the details of running a business can be like trying to nail Jell-O to a tree. The thing is, your business can’t run unless you carefully handle priorities like creating your business budget. In fact, bad accounting is the main reason many small businesses fail.
A budget calculator
These costs are easy to predict, so they’re easy to work into your budget. Some of the most common monthly fixed expenses for small businesses and start-ups include rent, utilities, equipment, website service fees, insurance, and labor. Common variable expenses include packaging, production, and shipping costs, sales commissions, and raw materials. More businesses are shifting to accounting software for making budgets, tracking expenses, recording revenues, and doing financial analysis.
But to avoid being among the 20% of small businesses that fail within their first year, you’ll want to take every precaution behind the scenes. Everything always costs more and takes longer than you think it will, and it will take longer to get sales going than you think it will. By changing your sales figures using the three scenarios above, you can see the result in your cash balance at the end of each month. This cash balance can give you information about your cash needs and how much you might need to borrow for working capital. If you are selling products, you might want to calculate your break-even point to include with your budget. The break-even point shows when you will start making a profit on each sale.
A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt. To create a budget in QuickBooks Online, for example, you break down your estimated income and expenses across each area of your business. Then, the software calculates figures like gross profit, net operating income and net income for you.
Facilities costs include all the costs of setting up a leased or purchased location for your store, office, warehouse, or other building. These costs may be called leasehold improvements or tenant improvements. For example, you may need walls or a bathroom or a special secure area in your office or building. Similarly, you can also calculate the variances by automated calculators integrated into the templates or budgeting software. Here are some free and open source small business budgets you can try.
Note that the Widget Inc. budget has a line item for gain or loss on sale, other revenue. While the company may have an actual transaction in the category, this line has a zero budget. Widget Inc.’s primary business is manufacturing and selling widgets, and the sale of equipment is not part of its annual budget. Accountants refer to these transactions as non-operating income and losses because day-to-day business operations don’t generate them.