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Do dollar signs keep you up at night?
If you’re a small business owner, you’re most likely nodding your head right now.
Take heart: You’re not alone. Your peers echoed this sentiment in a recent survey, where they revealed their top three worries as managers.
Two of those dealt with money, specifically managing cash flow and preparing for taxes.
Keeping a business afloat is no easy task, especially when you’re just starting out and your margins are thinner than you expected.
This is where a thorough business budget is key.
When you know what you’re spending and what you’re bringing in, you’re better able to make wise decisions that can set a solid financial future for your company.
Today, we’re discussing how to create a budget that’s as transparent and precise as possible, so you never have to guess at your bottom line.
Ready to learn more? Let’s get started.
What is a Business Budget?
Your business budget reveals where and how your company spends its money. It can be as basic as a table or as complex as a multi-tab spreadsheet.
As you build one, you’ll assign a job to every dollar, determining how it can best benefit your business. Then, you’ll review your budget to determine the accuracy of that projection.
At its core, a budget is designed to help business owners:
- Forecast expected earnings
- Plan future expenditures
- Analyze their plan against reality
As you prepare yours, remember that plans and circumstances may change along the way. Your budget should be flexible enough to accommodate those adjustments, always giving you a clear picture of where your finances stand.
Elements of a Thorough Budget
As you prepare your business budget template, there are eight components that are helpful to include. Let’s take a look at each one in detail.
1. Begin with Your Estimated Revenue
Your estimated revenue is how much money you expect your company to bring in from the sales of goods or services.
Make this the first line on your business budget. If you’re a startup, you may not know what to project.
While you may be full of confidence and tempted to type “$1 million” into the spreadsheet cell, do your homework first. Research income averages in your industry niche and use those as a baseline.
If you already have at least one year of operations under your belt, use last year’s figures as your estimated revenue.
2. Add a Line for Fixed Costs
Fixed costs should be the second line on your budget.
These are the regularly-occurring expenses that you know you’ll have to pay each month or on a routine basis. Some of the most common expenditures include your:
- Outsourced services (e.g. accounting, legal)
- Equipment leases
- Bank fees
- Core, in-house salaries
Regardless of how much money you make, you’ll still have to pay these costs as long as you’re in business.
3. Factor in Variable Costs
Unlike fixed costs, these are dependent upon your company’s production levels. They’ll escalate in busy seasons and dip when sales are slow.
For example, raw materials are a variable cost. The more orders you bring in, the more products you’ll have to make, so the more material you’ll have to purchase.
Other variable costs can include:
- Packaging materials
- Warehouse and production team salaries
- Shipping fees
- Production costs
- Travel charges
- Sales commissions
- Credit card fees
Notice that your core team salaries are listed as fixed expenses, whereas your warehouse employees are under variable costs. This isn’t always the case, but most often, your core team will pull an annual salary regardless of your sales levels.
Conversely, your warehouse or production teams may be hourly, and their work schedules might change depending on demand.
Your budget should outline how much you expect to spend on each of these categories.
4. Include Any One-Off Costs
Sometimes, you may have costs that only occur one time. Though they are not recurring, you should still include them in your budget.
For instance, this might include the expenses incurred to move your office to a new building, then furnish it.
Other one-off costs include purchasing a new hardware or software solution for the team. You might also have singular charges for research or training.
5. Estimate Your Cash Flow
How much money is moving into and out of your business?
You can measure this by designating a timeframe, such as six months or a year. Examine how much money is available at the end, then subtract how much you had at the beginning.
If there is more money coming in than leaving, your cash flow is positive (and vice versa). This number is the lifeline of your business and it’s critical that you keep a close eye on it.
If you don’t, it can be easy to become blind to your overall financial health. You may think because sales are booming, you’re on an upswing. Yet, do you have enough money on hand to pay your suppliers?
6. Calculate Your Profit
On this line, you’ll estimate how much money you expect your business to earn once you subtract your expenses and cost of goods sold (COGS) from your projected revenue.
That difference is known as your profit margin. As your business grows, so too should this figure.
If it isn’t what you want it to be, you may need to reassess your COGS and see if there’s anywhere you can cut. It may also require raising your prices in some instances to ensure you’re making enough to stay afloat.
7. Use a Budget Calculator
All of those numbers are great to have on hand, but they are rendered useless until you calculate them all together.
Using a spreadsheet, start by making a summary sheet that includes projected figures for all of the categories listed above. This will comprise your budget framework.
When the time period ends, create another column to the right and enter the actual amounts you spent in each category.
Finally, create a third column that depicts how much over or under you were. Use these calculations as a guide for next year’s budget, helping you to be as accurate as possible.
8. Tweak Depending on Industry
Depending on your niche, you may focus on one part of your budget over another. For instance, an e-commerce business will be more concerned with shipping costs than a service-only company.
Likewise, inventory-based businesses will need to keep a closer eye on vendor and material pricing than a software startup company will.
While these categories are fundamental to any basic budget template, the amount of time and consideration you give each one will fluctuate in accordance with what your company prioritizes.
Keeping Up with Your Budget
Create your business budget every year, remembering to check in every month or quarter to see where real life stands against your projections.
Making sure you’re on track with your finances is key, as this visibility helps you make needed tweaks to your spending, production levels, marketing efforts and more.
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