How to Create a Small Business Budget in 5 Steps
Small business owners have to take on all kinds of responsibilities for the sake of their company. One of those responsibilities is coming up with a business budget. Whether you’ve been in business for years or you’re just starting out, every business owner has to formulate a working budget if they want to be successful. That’s because a business budget can help you make informed decisions, improve profitability, and accomplish your long-term financial goals. To make it easier for you, we’ve created this simple five-step guide for creating a small business budget.
Step 1: Assess your total revenue
When coming up with a small business budget, the very first thing you’ll have to do is determine your monthly projected revenue. Once you figure out this number, you’ll have a better understanding of how your business is performing and what you can afford.
Take a look at all of your business’s sources of income. Review sales reports, go over any other income streams, and tally up the total amount of money your business is bringing in on a monthly basis.
If you’ve already been in business for a while, then look back at your records from previous years to come up with a figure for projected revenue. If you’re a new business, on the other hand, then carefully consider how much you realistically expect to make and compare that figure with similar sized businesses in your industry.
Step 2: Write down your fixed costs
Fixed costs are the expenses that stay the same every month. These are things that you have to pay for on a regular basis in order to keep your business up and running. Fixed costs for your business may include things such as:
- Fixed utilities (phone, internet, etc.)
- Website hosting fees
Add all of these expenses together in order to get the total amount that your business spends on fixed costs on a monthly basis. If you need help determining your fixed costs, then it might be a good idea to consult with your company’s accountant, who can look over past financial documents, review the accounting cycle, and ultimately provide you with accurate figures.
Step 3: Determine your variable expenses
Variable expenses are costs that can potentially change from month to month. These costs may change based on a variety of factors, such as your business’s performance in a given month and the number of sales you’re able to make. Variable expenses for your business may include things such as:
- Usage-based utilities (electricity, water, gas, etc.)
- Shipping costs
- Sales commissions
- Equipment maintenance and repair
- Marketing costs
If possible, it may be helpful to examine your business records and go over your past variable expenses for each month. This will help you as a business owner understand the relationship between variable costs and profits for your business. Going over past records is also helpful when coming up with a budget because you can use these records to calculate your business’s average monthly variable expenses over time.
Step 4: Create an emergency fund
Businesses should always have an emergency fund that they can use to cover unexpected costs that may arise. An emergency fund is especially important for small businesses operating with slim profit margins and a small amount of capital. While giant corporations can typically afford to deal with financial losses in case of an emergency, most small businesses don’t have this luxury.
So, what kind of situations would you need to dip into the emergency fund for? Consider what you would do if a warehouse stocked with inventory caught fire or an expensive piece of equipment essential to your business broke down.
In fact, the current COVID-19 pandemic is a perfect example of why a small business should maintain an emergency fund. Since the beginning of the pandemic, government-mandated shutdowns and poor economic conditions have forced roughly 100,000 businesses to permanently close their doors. Many of these businesses were surviving on slim margins and didn’t have the capital to survive these unprecedented circumstances. Thus, you can see how important it is to have an emergency fund with enough in it to cover significant unexpected costs.
Step 5: Come up with an outline
One you’ve come up with your small business’s projected revenue, calculated fixed and variable costs, and allocated money for an emergency fund, all you have to do is bring this information together. Subtract total projected costs from total projected revenue, and you’ll end up with the monthly profits for your business.
Although it may seem overwhelming at first, calculating a budget for your small business is easier when broken down into five simple steps. It may take some time, effort, and patience to get to a final budget, but it’s all part of running a business. And, in the end, you’ll likely be happy you did it, as a solid business budget can inform your decision-making and help you effectively grow your company.