6 Steps To Create A Budget For Your Small Business

Growing and managing a small business can sometimes be challenging. It requires wearing many different hats — often at once — to deal with sales, marketing, operations, and customer support, among other responsibilities.

Staying busy doesn’t mean you have to neglect your business’s finances. If your plate is full, you can very easily create and follow a small business budget to help you reach your goals.

HOW DOES A SMALL BUSINESS BUDGET WORK? 

A budget is an important tool you can use to plan for the future of your small business. It can help you control costs, manage your cash flow, identify risks, and do other things.

A budget is very easy to create and understand. You simply write down your monthly revenue and expenses. Then, allocate portions of your revenue to each expense. If you allocate 5% of your monthly revenue to your advertising expense, for example, you should try not to spend more than that on advertising each month.

However, a small business budget shouldn’t prevent you from spending if you need to. It’s meant to be a general guide that you use to control your finances — not a rigid set of rules with little flexibility. It serves to help you prioritize your spending and make better business decisions.

HOW TO CREATE A BUDGET 

A budget is easy to create and simple to understand. You can quickly develop one for your business in six steps.

1. Assess Your Current Financial Situation

The first step is to understand where your business currently is financially. Is your business profitable, breaking even, or are you struggling to pay some of your bills? This will help you decide if you need to cut back on some things or allocate more funds to other areas to grow faster.

You can do this by reviewing your financial data over the past 1-2 years. If you use bookkeeping software — like QuickBooks, Xero, or Wave — you can pull up and review your financial statements. Look for trends to see if your income and expenses are higher or lower at certain points of the year, like during the holidays or winter.

2. Set Clear Financial Goals

Setting financial goals will give you something to work toward. It will help you later as you allocate income to various expense categories. The goals you come up with are an important part of your small business budget, so write them down!

Include both short and long-term goals. A short-term goal could be something like “decrease operating expenses by 5%.” An example of a long-term goal would be to “increase annual revenue by 20% over the next five years.”

3. Identify Your Revenue Sources

Now, you need to determine your business’s average monthly revenue. You can do that by taking your revenue for the past year and dividing it by 12 months. Focus on your gross revenue, which will be at the top of your income statement. This is the amount your business earns before expenses are deducted.

4. Determine Your Expenses

Write down all of your monthly expenses, both fixed and variable. Then, add them up to determine your total monthly expenses. Your bookkeeping chart of accounts is a list of expenses that you can reference.

Fixed expenses are costs that remain the same each month. Examples include:

• Mortgage or rent
• Salaried employees
• Insurance
• Equipment leases
• Property taxes

Variable expenses are costs that vary each month. Add up your monthly variable expenses for the past year and divide by 12 to get a monthly average.

Examples of variable expenses include:

• Inventory
• Hourly wages, overtime, and commissions
• Utilities
• Office supplies
• Equipment maintenance and repairs

Subtract your expenses from your revenue to see if you have an operating profit or loss. You can then decide if you want to reinvest some of your profit to grow your business, pay off debt, or something else.

5. Allocate Funds

After you have determined your monthly revenue and expenses, you can now begin building your budget. 

It’s important to keep in mind that a budget doesn’t have to be complicated to be effective. You can create a simple budget with a pen and some paper, or you can use a spreadsheet if you prefer more detail. It’s up to you. Microsoft Word and many bookkeeping systems also include budget templates you can use.

To start your budget, create the following columns on paper or in a spreadsheet:

• Expense
• Budgeted Amount
• Actual Amount
• Difference

Under the “Expense” column, enter your expenses. Then, allocate a certain amount of your monthly revenue to each expense under the “Budgeted Amount” column. At the end of the month, you can record the amounts you spent on each expense under the “Actual Amount” column. The “Difference” column is used to record the amount you were over or under budget for each expense.

Don’t forget to budget for unexpected expenses or emergencies. Keeping some extra funds for these expenses can help you stay on track to meet your goals.

6. Monitor and Adjust Your Budget

Regularly review your budget to see if you need to make any changes. If you realize you are over budget in an area, it may indicate that you need to allocate more to that expense. If you are consistently under in another area, you may be able to reduce the amount budgeted to that expense to give you more for others. 

Budgets aren’t written in stone, and it’s okay to make changes as needed.

SMALL BUSINESS BUDGETING SUCCESS 

Using a budget is a great way to get control of your business’s finances. Making sure your business has the right financial partner is also vital for business success. It can help you save on fees and interest payments, and grow your savings faster. 

Fibre Federal Credit Union offers a wide selection of banking services to meet all of your small business needs and help you chart your growth path. 

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