As a small business owner, you might focus most of your time on the day-to-day tasks that keep your company going. But, don’t forget to plan for your future. Learning how to create a business budget can help you set goals and spend wisely.
A business budget puts you in control of your business. Use a budget for business as a tool to reduce risks, track progress, and leverage projected cash flow.
Parts of a business budget
There is no one way to build a small business budget. Small business owners use processes that fit their companies and operating styles. But, there are several parts of a business budget you should include.
Creating a business budget starts with projecting revenue. An easy way to estimate revenue is to analyze the different types of business records and small business ratios that you track. Previous records help give you an idea of earnings during the budgeted period.
If you do not have past accounting records, you can still project revenue. Gather information about your target customers and competitors by conducting a market analysis. Investigate average revenues for your industry. Use the data to project revenue and determine how to price a product optimally for your industry.
For business budgeting, you also need to determine the costs associated with your business. You might want to overestimate expenses. Expenses of a business include unexpected costs that can cause problems for your business if you do not prepare with a cash reserve. Without accounting for these hidden costs of running a business, your budget could be quickly undermined.
To identify workplace cost cutting ideas, you have to gather a baseline of your current costs. Make a list of your business expenses. Like revenue projections, you can use past accounting statements to plan for expenses. If you don’t have statements, research your industry averages, vendor prices, and local utility costs.
Once you list your business expenses, separate them into categories. Some costs fluctuate from month to month, while others stay the same. Sort costs into two groups: fixed expenses and variable expenses.
Fixed expenses stay the same from month to month. Your sales do not control the cost of fixed expenses. For example, rent does not fluctuate from month to month, no matter how much or little you make in sales.
Variable expenses fluctuate from month to month. Sales control the cost of variable expenses. For example, as the volume of your sales increases, you need more raw materials.
You need to project variable costs in your budget. To estimate fluctuating costs, look at past accounting records. You might expect to pay similar variable expenses as previous years. You can also use projections to determine how much variable expenses will cost you.
Projected profits help you estimate your bottom line. The bottom line is the amount of money your business brings home at the end of the day. To project profits, subtract your expected expenses from your expected revenue.
Use projected profits to avoid overspending. You can also plan for new equipment, a larger location, and more employees.
Remember projected profits are only estimates. Prepare for unexpected expenses with a cash reserve.
How to create a business budget
Create a business budget as a physical document. That could mean writing your financial plans in a notebook or creating a spreadsheet. It’s important to have a visual representation to refer to and change as needed. Make sure you can adjust your budget as business operations change.
You might want to meet with an accountant for how to create a business budget. Consulting a professional could help you make effective decisions. An accountant can help you understand your finances for when you need a budget for business.
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