How to Create a Business Budget: Guide for Small Business Owners
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.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#69727d;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#69727d;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block} Yoo-hoo! Do you have big dreams of building a successful business? Don’t let it be a pipe dream. A well-crafted budget can be your roadmap to success. Creating a business budget can be an overwhelming task. But with me as your guide, you’ll be a budget-building pro in no time! Hello! My name is AJ. I recently sold my business for several millions of dollars. I attribute much of my early success to the fact that I created a budget and stuck to it. So, let’s get started!
Key Takeaways
By creating a budget and closely monitoring your spending, you can ensure that your business remains profitable.
Remember to set monthly revenue and spending goals, be conservative with your projections, and plan for growth.
There are several different budgeting methods, so choose the one that best fits your needs and goals.
Your business budget should be a living document that you adjust regularly.
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.elementor-heading-title{padding:0;margin:0;line-height:1}.elementor-widget-heading .elementor-heading-title[class*=elementor-size-]>a{color:inherit;font-size:inherit;line-height:inherit}.elementor-widget-heading .elementor-heading-title.elementor-size-small{font-size:15px}.elementor-widget-heading .elementor-heading-title.elementor-size-medium{font-size:19px}.elementor-widget-heading .elementor-heading-title.elementor-size-large{font-size:29px}.elementor-widget-heading .elementor-heading-title.elementor-size-xl{font-size:39px}.elementor-widget-heading .elementor-heading-title.elementor-size-xxl{font-size:59px} What is a Business Budget?
A business budget is a financial plan that outlines how much money your small business has and where it will be spent. It also includes estimated income and expenses over a specified time. A well-crafted budget can help you manage costs, increase profits, and meet short-term and long-term goals. Think of it like a roadmap for your business – it tells you where you’re heading and how to get there.
Why is a Business Budget Important?
There are several reasons why creating a budget for your small business is important. Let’s take a look at some of the benefits. A Business Budget Helps You Establish a Financial Plan Creating a budget is the first step to establishing a financial plan for your small business. This will help you understand your current and future finances, make informed decisions about allocating resources, and set realistic business goals. Imagine if you were going on a road trip and didn’t have a map. You’d be more likely to get lost or make wrong turns. The same applies to your business – without a budget, you won’t have a clear sense of direction or know how to measure your progress. A Business Budget Helps You With Financial Predictions A business budget can help you with financial predictions. You can accurately estimate and plan for future expenses and predict sales trends to adjust your budget accordingly. By creating a budget and tracking your finances, you will have an idea of how much money you’ll need for any investments or major purchases in the future. You can find out, on average, what kind of business expenses are expected and adjust your budget accordingly. It can also help you plan for seasonal fluctuations in your sales and how to manage those if they occur. A Business Budget Helps You With Growth Targets & Sales Goals When you create a budget for your small business, it will help you set realistic growth targets. You will be able to identify areas where more funds are needed and ensure you allocate enough money in the right places. By understanding your financial situation, you can plan for long-term business growth and focus on future goals that will benefit your business. As a business owner, planning and setting achievable goals is essential. A Business Budget Helps You Monitor Performance Your business budget will also help you monitor and evaluate your business performance. You can adjust the budget by identifying key areas to save money. This will enable you to understand better how much money is coming in and going out of your business. Once you have everything in place, it’s time to start tracking your budget and finances. By doing this, you can quickly identify any discrepancies that may be causing problems with your budget. A Business Budget Helps You Manage Cashflow Creating and following a business budget will help you manage your cash flow better. You will see where your money is going, and it can also help you plan for future expenses. By tracking your spending, you can ensure that any unexpected costs don’t throw you off track. Remember, cash flow is king! Knowing your cash flow will help you make informed decisions about managing your finances and keeping your business running smoothly.
Pro Tip #1: Be conservative with your projections. Don't get too carried away and overestimate how much money you can bring in or spend.
- AJ Silber
How Does a Small Business Budget Work?
Now that you know why creating a business budget is essential, let’s discuss how it works. The first step to creating a small business budget is determining your income and expenses. This will give you an idea of how much money you have coming in and going out each month, and you can set goals for your budget and allocate resources accordingly. You will also need to keep track of your progress by monitoring expenses and comparing them to the budgeted amount. So you aren’t out there spending money you don’t have. If you find that there are discrepancies, then adjustments can be made to stay on target. It’s important to keep referring back to this budget to ensure you are still on track and meeting your goals. Creating a budget is essential for all small businesses because it helps you manage your finances more effectively.
Types of Business Budgets
Let’s look at the different types of business budgets and how they can help your small business. Master Budget A master budget is all of your company’s planned income and expenses, consolidated into one document. It’s created annually and includes estimated sales, production costs, overhead costs, capital expenditures, and other financial commitments. The master budget is a comprehensive plan that encompasses all aspects of your business operations – from running day-to-day activities to long-term planning. Operating Budget An operating budget covers the day-to-day business expenses, such as salaries, materials, and other operational costs. It’s usually created monthly or quarterly to help you manage daily operations more efficiently. Cash Flow Budget A cash flow budget is designed to help businesses manage their money and plan for any changes in cash flow. It takes into account the expected costs of operating a business as well as any expected revenue. The goal of this type of budget is to ensure that there are enough funds available to keep operations running smoothly. Financial Budget A financial budget is designed to give a business an overview of its finances. It takes into account the expected income, expenses, and debt payments for a given time. It also helps businesses plan for investments and other large purchases before they happen. Static Budget A static budget is a budget that doesn’t change, no matter what happens. It’s designed to give businesses a baseline of what their expenses and income should be regardless of market or business environment changes. A company might use a static budget when they know their expenses will stay the same for a given time.
Pro Tip #2: When I ran The Guerrilla Agency, we had several bank accounts for money we earmarked for profit share, marketing, owners compensation and operating expenses. Setting money aside systematically can do wonders for your budget!
- AJ Silber
How to Create a Business Budget
I have a list of steps that you can follow to create a successful business budget. Step 1: Calculate Your Average Monthly Revenue The first step is to calculate your average monthly revenue. This means adding up all your income over the past year and dividing it by 12 months. This will give you a good indication of what kind of money your business can expect over each month. If you’re just starting, estimating based on your projections is best. Please also take into consideration your revenue increases. If your revenue is growing 10% month over month (steadily), take that into account. Step 2: Subtract Fixed Cost Once you have your average monthly revenue number, it’s time to subtract your fixed costs from that figure. What are Fixed Costs? Fixed costs are expenses you must pay each month , no matter what. These payments remain the same each month. Fixed Cost Examples This could include: Rent Utilities Insurance Salaries Accounting Fees Other Regular Payments Step 3: Subtract Variable Costs The next step is to subtract any variable costs from your total. What are Variable Costs? Variable expenses are those costs that fluctuate each month depending on sales, production costs, and other factors. Variable Cost Examples These could include: Advertising Supplies Materials Maintenance Postage Shipping Fees Advertising Costs Step 4: Determine Your Gross Profit You’ll be left with your gross profit once you subtract the fixed and variable costs from your total. This figure is what’s left after all of your expenses are paid, and it’s the number you can use to make decisions about budgeting for future purchases or investments. Think of gross profit as the money you have to invest back into your business. Gross Profit Formula To calculate your gross profit, use the following formula: Gross Profit = Total Revenue – (Fixed Costs + Variable Costs) While this formula isn’t complicated, tracking your expenses and revenue accurately is crucial for an accurate gross profit figure. Step 6: Account for Net Profit & Taxes You’ll also need to account for any taxes you must pay and subtract them from your gross profit. This will give you the net profit number, which is the amount of money you’ll have to invest back into your business. Step 7: Monitor Your Budget Now that you have a budget in place, follow it carefully to get an accurate picture of your profits. By regularly adjusting your budget to accommodate changing expenses and revenue , you can make sure that your business remains profitable. Also, keep track of any investments or major purchases so that you can accurately adjust your budget accordingly. Having a good handle on how much money is coming in and going out each month will help you manage your finances more efficiently.
Business Budgeting Tips
Here are a few tips that have helped me with budgeting for my business. Tip 1: Set Monthly Earnings Goals When creating a budget, one of the first things I like to do is set a monthly earnings goal. This way, you can ensure you’re allocating enough money to meet your business’s goals. Not hitting your earnings goals? Allocate more of your budget to sales or marketing! Tip 2: Set Monthly Spending Goals You should also set monthly spending goals based on the money you have coming in. This means establishing how much money you can spend on supplies, advertising, and other expenses without exceeding the budget. When I ran my agency, we allocated a certain percentage to OPEX (operating expenses). From there, we created different “buckets” for an owners draw, taxes, profit and even marketing. Tip 3: Analyze Areas of Weakness When tracking your budget, it’s crucial to analyze areas of weakness. Are there any expenses that are higher than they should be? Are you spending too much money on advertising? These questions can help you identify problems and make necessary changes to keep your business running smoothly. Tip 4: Make Predictions Monthly on the First I recommend making predictions monthly on the first day of the month. This helps you anticipate any expenses or revenue changes and make better budgeting decisions for the next month. Pro Tip: You should create a spreadsheet with two columns every month. Column A should be your projected budget, and column B should be your actual budget. From there, review your budget at the end of the month! Tip 5: Factor in Seasonality/Industry Trends When creating your budget, it’s a good idea to factor in seasonality and industry trends. For example, if you have a business with seasonal peaks and troughs, then account for those in your budget. The same goes for any industry-specific trends. If demand for your product or service declines, adjust your spending accordingly. Tip 6: Keep Your Personal & Business Accounts Separate Your personal finance should not be mixed in with your business finance. Keep the accounts separate! Having two different accounts will help you keep track of your expenses on both sides and avoid any confusion. Tip 7: Choose a Solid Budgeting Tool Finally, choose a solid budgeting tool to help you stay organized and on top of things. Plenty of different options exist, from cloud-based tools to spreadsheets. Choose the accounting software that works best for you and your business. For budgeting, we usually use Quickbooks (because it’s cheap and easy to use) but most other apps will work. Tip 8: Be Conservative With Revenue When estimating your monthly revenue, be conservative with your projections. Don’t overestimate how much money you’ll earn this month . It’s easy to get carried away and spend more money than you have coming in. If you are conservative, you can ensure that you always stay within budget and meet your goals. Tip 9: Plan for Business Growth Lastly, always plan for growth. This doesn’t mean you have to make large investments or take risks; it just means that you should be ready to scale up when the opportunity arises. Keep an eye on industry trends and make adjustments to your budget accordingly. That way, you can ensure that your business can grow without putting too much strain on the budget.
Best Business Budgeting Software
I have a couple of favorites when it comes to budgeting software. Zoho Books Zoho Books is a cloud-based accounting solution that helps small businesses manage their finances. It offers features like invoicing, expense tracking, and budgeting. It also integrates with popular apps like PayPal, Stripe, and QuickBooks. QuickBooks QuickBooks is a powerful accounting platform used by many small businesses. It offers a range of features including invoicing, budgeting, expense tracking, and inventory management.
Business Budget Conclusion
Business budget planning is the key to successful business management. Having a well-thought-out budget will help you make sound financial decisions, stay organized, and maximize profits. As a small business owner, you must know how to create a budget and understand its components. Plenty of budgeting tools are available to help you keep track of your finances and manage them more efficiently. With a good understanding of business budgeting fundamentals and the right tools, you can ensure that your business runs smoothly and stays profitable for years. Do you have any tips that work well for you when creating a business budget? Let us know in the comments below!
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