How to Build and Benefit from Your Small Business's Budget
Budgeting is the most powerful tool you can ever implement in your business. If you don’t structure your finances and bookkeeping correctly, your business is at risk of failure. For many small businesses having a business budget could be the thin line between the success and failure of that business. Managing a business can be a lot of work as you have a lot of moving pieces that you need to keep track of. Between marketing, getting clients, and establishing a digital presence for your company, you hardly have time to think about a business budget.What is a business budget, and do I need it?
A business budget is a true visual representation of the finances of your business. This budget will tell the story of the financial history of your company and projections into the future after outlining the current status of the business. A business budget is your financial roadmap and helps you predict the future.
How to build a small business budget
1. Define your income sources
The best place to start when creating a budget is to know your income sources. Know how much you get from each source. Some business models allow for multiple income sources, and some only have one income source, so you need to outline which one yours is. For example, if you own a Car Wash business, you could make money from washing cars, selling car washing products, and selling drinks to people as they wait for their cars to be washed. Add all these incomes together to get a total. Remember to use revenue (all the money before deductions) and not profit (money after deductions). Start with income sources per month and continue to look at the whole year.
2. Define your fixed and variable expenses.
The second thing to do when creating a budget is to research and define your costs. Proper research and planning are the golden keys to avoiding financial surprises and unexpected costs. The important thing to know is that you should always overestimate your costs so that you do not fall short. There are two main types of expenses: fixed and variable expenses.
Fixed costs are known costs that remain the same every month. Examples of these are salaries, legal fees, rent, debt/loan repayments, insurance, tax, and other utilities such as internet costs. When you create your budget, you must include these expenses as they are always recurring.
Variable costs are not fixed and are usually concerned with sales. They are different from day to day and month to month because they depend on how your business is performing and all the activities your business does. Examples are commissions, costs of goods sold, marketing, travel costs, marketing costs, gifts for clients, team building sessions, new office furniture, and in some small businesses, labor costs. Utilities like water and electricity are also variable depending on how much your business uses them. The cost of variable expenses will differ seasonally. When your business is going through its peak season, and there are higher profits, then you are likely to spend more on variable costs. The longer you run your small business, you will be able to have an average estimate of your company’s variable cost.
Startup costs are the costs needed for you to start a small business. Only have a budget for these costs if your business is still starting.
3. Determine future revenue
It is important to project revenues and make proper revenue forecasts. These should be clearly understood by the whole team in the business so they can all work towards these forecasts. The best place to start with these projects is to use the previous year's target. Do not make these estimates unrealistic.
4. What is your full-year cash flow projection?
Create a full income and expenses estimate for 12 months. Always use the previous year’s closing balance as your opening balance for the following year. This opening balance will affect your cash flow for the next year. For businesses whose operations are seasonal, be sure to record which months are likely to bring in more money and which ones do not. Then adjust your business budget accordingly, like reducing costs on months where you will receive less profit. For example, a coffee shop may make more money during the winter months than in the summer months when people prefer something cooler to drink. Your business could be affected by the school calendar, tourist travel patterns, weather, and natural disasters.
To deal with season changes, maximize your sales at peak months and use the extra money to create savings for the fewer productivity months. You might need to hire extra staff over the peak time to increase productivity. This is a cost you need to put into your business budget. You might also need more goods during this period. Do your research, and you will be a successful small business with an excellent budget.
5. Cash flow interruptions beyond your control
Even small businesses rely on customers for income. Sometimes these customers skip payments or do not pay you on the agreed date and time. This will affect your cash flow because you also have bills of your own to pay. Let your customers know that they cannot delay payment for a certain period and communicate the penalties. As a small business, keep money aside to cater for such incidents.
6. Uncertain times
If there is anything that the Covid-19 global pandemic has taught us, it's that our lives can change in the blink of an eye. The financial well-being of a small business is dependent on economic, political, and social factors. When these factors come into play for either the good or the bad, your small business must be ready. The best way to be prepared is through your budget. Be flexible in your budget. You might have to increase or decrease your services and goods prices when the economy is down or increase the prices when things improve. Your industry could grow, and this will have an impact on a budget of your business and the daily operations of your business. To be ahead of uncertain times and unexpected expenses, set up a contingency plan.
7. Future once-off expenses
Take note of all the one-time spending that you can predict for the future and put them in your budget. These expenses can throw you off your budget if you have not planned for them and result in unexpected costs. An example could be getting a new laptop, replacing your cashier register, or replacing old furniture. Plan for these expenses and add them to your budget
8. Balance your spreadsheet
By subtracting your total expenses from your total income, you will be able to get your net income. This is known as the profile and loss statement or your gross margin. If you have more expenses than income, review your budget and cut the spending, and rather focus on increasing income by getting more clients. Also, try to invest your profits so that you continue to make more money. If you have a habit of overspending, use a budget to keep you on track.
9. Suppliers are your best friends, negotiate
For all the services you purchase and goods you purchase from suppliers for your small business, try to negotiate a discount. This is worth exploring, especially if you buy in bulk. Build a good relationship with your suppliers, and they could save you a lot of money.
Benefits of a small business budget
1. Control spending and reduce risk
A budget allows you to have more hands-on control over your spending as a small business. When a business overspends, it is likely to seek financial assistance. If this financial assistance is not properly managed, then it could lead to debt which could be detrimental to the successful running of the company. Sometimes you could have to sell your business to pay off debt.
2. Manage and reduce unexpected cashflow
A budget allows the manager to make the hard choices to say no or yes to things that will affect the cash flow. These could be extra expenses that were not budgeted for. Business budgets also reduce impulsive spending of a business, such as costs to renovate your small coffee shop because your competitor is also repainting. If you spend more than originally budgeted for that specific financial year, then you could be depleting your profit.
3. Business budgets give a true representation of the business, thus allowing the manager to make informed business decisions.
Any business that has a proper budget can see how good or bad the business is doing financially. Having this knowledge allows the business management team to make decisions quicker and react to any financial issues the company could face. A budget also helps you to forecast the company’s financials, and if you are heading for a disaster, you can quickly come up with a plan to mitigate the risk. With a business budget, you will be able to highlight areas of your business where you can increase profitability and revenue and maybe decrease spending in other areas.
4. Financial targets
Every business needs to set its financial targets. If you meet your financial targets or have surplus money, you can invest that money. If the small business has multiple departments, a budget allows you to monitor if the individual departments have reached their target. It also allows you to analyze the financial trends of the company.
Lastly, when you are done with your budget, be sure to review it frequently. You can do monthly reviews, quarterly reviews, and yearly reviews. This helps you keep track of the finances of the business. Your employees or individual departments will use these meetings as a checkpoint for where they are. Remember that your business budget is a living document that you need to update regularly.
