5 simple steps to making a small business budget
Budgeting for your start-up or small business
A budget is a powerful tool that will provide a roadmap to achieve your vision. It is a plan of your business’s revenue, expenses, and profits over a set period and plays a key role in understanding your financial position and facilitating better financial decisions.
Every small business is unique and will have a different approach to budgeting. Budgeting for a small business doesn’t need to be complicated, but it is crucial to invest time and resources into making it as accurate as possible. Many small businesses fail to prepare a budget, and without a budget, they run the risk of overspending, leading to financial difficulties or even the collapse of the business. A business may also miss valuable opportunities by not utilising surplus money to reinvest and grow.
A budget can help you with;
- Understanding the break-even point of your business
- Actions needed to be profitable
- Recognise where money is being spent and where costs can be cut
- Expose opportunities to increase revenue
- Reveal surplus cash that can be reinvested to facilitate growth
- Facilitate better strategic business decisions
- Scenario analysis – test how decisions may impact your profitability
- Understand and plan your funding requirements and apply for and source the most appropriate funding
- Help you reach your financial goals
5 simple steps you can take to help you prepare a budget for your small business.
1. Budgets + estimating revenues
Determine all the sources of revenue in the business, such as sales of goods, fees for services, commissions or data access fees. Past financial data is a great starting point to investigate and capture patterns in your revenue streams. It may also be helpful to research market trends, seasonal influences and industry conditions that may impact your business and help predict your future revenue. You can make necessary adjustments to past data for any planned changes to your businesses operations or expected impacts from industry, market or seasonal influences. Combine the income sources that you have determined and break this up into expected monthly revenue.
2. Estimate the cost
You will need to determine all your expenses for the business. Start by using past financial data and again consider market, industry and seasonal influences that may impact your costs. It is helpful to split your costs into fixed and variable and break this into expected monthly costs.
- Fixed Costs
Fixed costs are expenses that do not vary regardless of the level of sales or business operations. Examples may be lease payments, loan repayments, depreciation, insurance and staff salaries.
- Variable Costs
Variable costs will change based on the level of goods or services produced or sold. Some examples may be the cost of materials used in production, wages and utilities.
3. Allow for Contingency
Your business may face unforeseen challenges, and as much as you plan, there will always be a level of uncertainty in business. You will need a contingency fund to be prepared for unexpected once-off expenses that may arise.
4. Bring it all together
Once you have forecasted your expected revenue, fixed and variable costs, and a contingency allowance, you can calculate your expected net profit or loss to understand your business’s profitability. With this information, you can then further analyse your position and assess where costs can be cut, where there might be opportunities to increase revenue, and where there may be some additional risks that need to be considered.
5. Monitor and track
When the budget is completed, you can start comparing the budget with actual revenue and expenditure as they arise to track and compare your progress and meet your targets.
Make use of widely available tools to help you create your budget. Accounting software will help you to obtain key past data to collate when building your budget. You may choose to build the budget in a spreadsheet or specific software with this functionality. A bookkeeper or accountant can also assist with this process and remove the stress. Whatever you choose, make sure it is easy to use and maintain. Many businesses start with good intentions then find it too time-consuming and tedious to maintain.
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