Just as it is with your personal expenses, it is essential to have a budget in place for your small business. A good budget helps you estimate your income and expenses over a period of time – usually a calendar year with a small business –allowing you to make important decisions for your company.
If you are not someone who is good with numbers, you may be daunted by the task, but not using a budget can set you up for failure. By creating and following a budget, you will be able to see how much money is coming in and how much is going out. It also reveals how you can more effectively allocate your resources and determine risks and rewards down the road.
Whether you are just launching a start-up or looking to re-tool your existing small business, here are seven steps for creating a budget.
- Define your expected sources of revenue. This list can include sales, accounts receivables, interest, grants and any other sources that are specific to your industry. For a new business, predict your total start-up costs.
- Examine and list your regular expenses. What are your basic operating costs? Fixed costs can include rent, leased furniture and equipment and insurance. Variable costs – those that can swing seasonally or according to sales or the economy — can include inventory, marketing, wages and transportation.
- Now use this information to create a spreadsheet. There are many accounting software options to help you create a simple spreadsheet. Keep in mind that it does not have to be highly detailed (such as breaking down your electricity bill from your water bill under utilities) unless those numbers are pertinent for your industry.
- Look for balance. Of course, the simple goal of any business venture is to take in more money than you spend. You can use the spreadsheet to see where and when your revenue stream is out of balance so that you can make adjustments. For example, how can you reduce expenses during the summer if your sales are off during that time of year? Should you cut back on marketing then or hire seasonal employees for the holidays to avoid keeping staff on payroll during the slow periods?
- Do your homework. Revisit any previous budgets you have made to see how your business has changed. Adjust your numbers as needed. Research sales and trends associated with your industry. If this is your first budget, the Small Business Administration (SBA) advises you to check with trade and professional associations, accountants, bankers and others in your industry to make a reasonable profit estimate for your company. You also can do some online or library research about your industry and speak with other business owners who are in the same or a similar field as you.
- Plan for the future. When you see how the numbers match up, you can use your budget to plan for needed expenditures or improvements, such as purchasing that piece of equipment, hiring that new staff member or moving to a bigger office and/or better location. The budget will allow you to be better able to allocate funds for that project.
- Review your budget. Creating a budget is not a one and done kind of thing. Many experts recommend that you review your budget on a regular basis, such as the end of every month or every six months. Remember your budget is not set in stone; you can make revisions as needed. Unexpected expenses and market swings can throw the best of budgets off kilter, so a regular review can help you adjust your spending and/or services to keep things in line.
Regular budget reviews are good times to price compare some of your regular vendors and suppliers. Don’t hesitate to shop around for better service or for better prices on big expenses such as internet service, insurance or even office supplies. Consider cutting or reducing non-essential expenses when necessary.
Once you have a solid working budget in place, you will find that you will feel more confident in making sound decisions and setting priorities for your company. This simple tool will make your whole operation run more smoothly and efficiently.
Here are a few online resources to help get you started:
https://www.score.org (non-profit resource center associated with the SBA)