People are budgeting more than ever—86% of Americans, to be exact. And they’re budgeting for a good reason. Eighty-five percent of people said budgeting helped them get out or stay out of debt. Whether you’re a budgeter in your personal life or not, one thing’s for certain: Budgeting for your business is a must.
Like a personal budget, your business budget maps out your spending and income during a period (e.g., year, quarter, etc.). You can work toward company goals like increasing profits and decreasing debt through a budget.
But first, you need to know how to create a business budget … which is exactly what we’ll cover below.
How to create a business budget in 8 steps
Creating a budget takes time. In fact, 20% of survey respondents said they don’t budget because it’s too time-consuming. But if you want to avoid overspending, you need to set aside time to budget.
Generally, you should create a budget that breaks down spending and income by month, quarter, and year.
Pro tip: Always put your budget in writing! The last thing you want to do is create a budget in your head and call it a day.
Learn how to create a business budget using the following eight steps.
1. Analyze historical data
Unless your business is brand new, you should have historical data to help craft your budget. How did your business do last year? Did you have a budget surplus, or did you overspend? Why?
Review your spending habits from the previous period. And, use income data to project for the future. That way, you can base your current budget on historical data.
Pull information from:
- Past budgets
- Income statements
- Balance sheets
- Cash flow statements
2. Choose the type of budget
There’s more than one budget to create—much more. When choosing between the types of business budgets, consider your business needs.
Budget types include:
- Operating budgets: A budget that details the funds your business needs to operate efficiently.
- Cash flow budgets: A budget that predicts the money coming in and going out of your business.
- Sales budgets: A budget that projects how much you’ll sell in a specific period, along with revenue and expenses.
- Labor budgets: A budget that helps you plan payroll costs by determining how many employees you need to hit a certain level of production.
- Capital budgets: A budget that helps you prepare to purchase large assets like machinery and property.
Generally, businesses use more than one type of budget. That way, you can budget your company’s spending and revenue along with department spending and revenue.
3. Project your revenue
How much do you expect your business will bring in during the period? One of the first steps of creating a budget is to project your revenue.
To project revenue, you can:
- Analyze historical information (e.g., business records and ratios)
- Gather information about your target customers
- Analyze your competitors
- Research average revenues for your industry
Add up your income sources and estimate how much money your business brings in monthly. Remember to account for seasonality.
4. List out your expenses
How much does it cost to run your business? When it comes to knowing how to create a budget for a small business, you can’t forget your expenses—all expenses.
To get started, you can use historical data (e.g., accounting records) and research industry averages, vendor prices, and local utility costs.
Make a list of your business expenses. Because some costs fluctuate by month, consider breaking expenses into the following categories:
- Fixed expenses
- Variable expenses
- One-time expenses
Fixed expenses stay the same each month. Sales do not impact your fixed costs. Generally, predicting fixed expenses is easy since they do not fluctuate regularly.
Examples of fixed costs include:
- Loan payments
Variable costs fluctuate each month, based on your business’s sales. This type of expense increases when your sales increase and decrease as your sales decrease.
Examples of variable expenses include:
- Direct materials
- Direct labor
- Shipping expenses
One-time expenses are costs your business has every so often. They are not repeating costs. For example, you may be planning on buying a new laptop, copy machine, or company car during the year.
5. Give yourself a cushion
In both life and business, things happen. Maybe a pipe in your brick-and-mortar bursts, requiring a $10,000 payout. Or, you spend $2,500 replacing your copier when it breaks down. Whatever the situation, expect the unexpected.
For accurate budgeting, give yourself a cushion for unexpected expenses. You can budget for a cash reserve, which is an emergency fund for your business. Consider setting aside money each month or quarter to put in your reserve.
6. Consult a professional
Knowing how to make a business budget is important. But that doesn’t mean you have to handle it on your own.
You might consider consulting a professional, like your accountant or small business lawyer, to help you create your budget. They have the experience and know-how to keep your budget realistic and help you make effective decisions.
7. Format your budget
Sure, a Post-it note or scrap piece of paper may work for your personal budget. But when creating your business budget, you need to format it.
Consider using a spreadsheet or template to finalize your budget. For example, you could create something like this basic budget example:
|Expenses – Fixed|
|Expenses – Variable|
Get as detailed as possible when formatting your budget.
8. Assess throughout the year
Knowing how to create a company budget requires one more thing: consistent assessment. More than likely, your business won’t 100% stick to your budget. And that’s OK! To keep up with changes, assess your budget—and business operations—throughout the year.
You may need to update your budget if:
- You need to hire more employees
- You need to let employees go
- Your suppliers raise their prices
- You decide to change suppliers
- Your products sell out
- You switch business locations
Make your budget a living document you continually edit and update throughout the year. That way, you can address situations as they arise—not the next year.
Looking for an easier way to track expenses and income, generate reports, and break down expenses and income by department? With Patriot’s online accounting software, you can do all this (and so much more!). Get your free trial today.This is not intended as legal advice; for more information, please click here.