A budget is vital to the success of a business. To make a profit, one should understand how to spend money wisely. A business budget involves expenses, revenue, and how much money the business has on hand.
A business budget is an action plan that outlines financial and operational goals. Its purpose is to help track and manage income and expenses for the future. A business budget is an essential part of a business plan. A budget helps a business reach its goals. Budgets can cut business risks, identify problems, and recognize opportunities. Without a budget, a business is operating blindly.
A budget is an opportunity to determine:
- Total startup costs
- Operational costs
- Necessary monthly revenue
- Realistic profit estimates
- Funds needed for expenses
Calculate Average Income
If this is your first year in a business, this will be an estimate of income. This will be easier to calculate after year one, as you can use your first year’s income as a comparison. It is better to underestimate income than overestimate. This can be adjusted month to month. Budget planning revolves around revenue and income.
Examples of income sources include:
- Hourly income
- Product sales
- Investment Income
Determine Fixed Costs
Fixed costs refer to any recurring expenses that stay the same every month. Fixed costs can be daily, weekly, monthly, or yearly expenses. Bookkeeping and financial statements are helpful in determining this. Financial statements should include an itemized list of all fixed costs. Examples of fixed costs include:
- Website hosting
A startup company will need to estimate some of these costs as it does not have previous years to base fixed costs on yet. Once fixed costs are determined, subtract those from your income.
Tally Variable Expenses
Variable expenses are listed in itemized financial statements from the previous year. Variable expenses are those that respond directly and proportionately to changes in activity level or volume. These expenses do not have a set cost month to month. Examples of variable expenses include:
- Marketing costs
- Sales commissions
- Shipping costs
Travel and utilities can vary throughout the year. Areas where temperatures fluctuate can shift expenses. Travel will often depend on preference – roads or airways. Subtract variable business expenses from income.
Set Up an Emergency Fund
This fund is for any unexpected events. This fund is to cover costs like equipment replacement, a fire or a break-in, or any natural disaster. Funds from this can help cover basic costs until an insurance claim can be filed and insurance payments are distributed.
Finalize the Numbers
Once you review your income, fixed costs, and variable expenses and set up an emergency fund, you can determine the expected profit for the upcoming year. Growing profits are a sign that a business is growing. If profits are growing, you need to determine how those profits will best benefit your business.
You can always reinvest in your business. A business budget can be adjusted if the numbers do not come out as expected. If expenses are higher than estimated revenue, you can make adjustments. You can adjust figures throughout the year. If revenue increases or decreases, you can change how you spend your money.
Create an “At-a-Glance” Budget Spreadsheet
A spreadsheet can provide you with a budget summary. Excel is a great resource. Google sheets and The Balance provide free templates. Budget evaluation should be a regular habit. Successful companies continually monitor and adjust their budgets as needed. Proper budgeting allows for responsible and more successful growth.
Examine your revenue. Look backward at your existing business and find all of your revenue sources. Add your income sources together to discover what money comes into your business monthly.
Budgeting for Different Types of Business
Enterprise business – An enterprise is a term for a large corporation with several hundred employees or more. A large company with different departments will need specific budgets. This type of budget can be technical and will need participation from all the departments. Department managers are an important part of the process. They will be able to offer significant feedback for day-to-day operations.
Small businesses – A small business can have a wide range of employees, up to 1500. The Small Business Association has size standards to help determine if the business qualifies as “small.” Small businesses with less than 20 employees make up about 89.6% of all US businesses. This type of business may need several budget scenarios, including best/worst-case scenarios. This way, as the business grows or is slower than expected, you can adjust.
Seasonal Business – Seasonal businesses will have high and low points during the year. This needs to be considered when making the budget, as some months will have little to no income.
E-commerce Business – Shipping is a significant budgeting factor when operating an E-business. The business can cover shipping costs or pass those costs on to the consumer.
Startup business – Budgeting is difficult for a startup company. A startup does not have previous months to base its budget estimates on. Be sure to do your research. Consider reaching out to networking friends and fellow business owners for guidance.
Custom Order Business – Those in the custom order business must consider the time commitment and materials needed. Some custom-order businesses require a deposit upfront. This ensures payment if someone backs out.
A business budget can help your business by:
- Making it more efficient
- Pointing out funds leftover for reinvestment
- Predicting slow months
- Keeping you out of debt
- Estimating what it will take to become profitable
- Predicting your business future.
- Helping control your business