Starting a small business comes with a lot of responsibility. And while developing a service or product that attracts a loyal customer base comes first for making a profit, plenty of other factors can make or break a venture. To ensure your hard work bears fruit, you'll need to set up systems that will guide you through the process of successfully running a business.
Creating a small business budget is one of those systems. And it could even be argued that it's one of the most impactful plans for guaranteeing impressive gains.
So, if you want to ensure you're doing everything you can to help your business thrive (and survive), this how-to guide for creating a business budget will teach you how to plan your business finances.
The benefits of creating a business budget
The idea of spending your precious time on making financial plans may seem tedious or even a waste of your energy — especially if you'r not good with numbers. Nonetheless, creating a business budget (with a lot of attention to detail) offers a host of benefits for your company as well as your sanity.
Having a detailed budget boosts business efficiency & profitability
That's not only because it gives you a plan for how to spend your hard-earned money. But, more importantly, having a financial strategy empowers you to make intelligent investment decisions. It ensures that your business plans aren't hindered by a lack of funds or poor cash flow. And it gives you a clearer idea of how much you can expect to earn, making it easier to figure out whether you need to scale operations or cut back on costs.
Financial planning is one of the best forms of risk management
A business budget is one of the best ways to prevent yourself or your team from overspending. So, if you want to avoid debt or if you know that you're operating in an industry that experiences seasonal fluctuations in sales, you can create a financial plan for the future and ensure that your business survives the inevitable financial setbacks and off-season periods that most new brands experience.
Identify growth opportunities for your business
When you have a solid overview of what you can expect your revenue and expenses to be, you can pinpoint ways your brand is exceeding or failing to meet expectations. This data alone is an excellent indicator of growth opportunities for your company and a valuable way to recognize areas for improvement.
Finally, if you're still not convinced that creating a business budget is worthwhile, remember this: more than 20% of new organizations fail within a year. But, if you're in it for the long run, you'll stop procrastinating with this crucial planning step and create a financial guide that will allow you to make intelligent, data-based decisions guaranteed to result in success.
The costs your business budget should account for
Knowing what you'll gain by creating a business budget, it's time to explore the costs this financial plan will account for.
First and foremost, a business budget will provide you with an estimate of the revenue you can expect. Predictions regarding how much money your business makes give you a clearer idea of how much you can spend (which is essential if you want to ensure profitability).
The second component of your business budget will be your expected expenses. Traditionally, these will include fixed (rent, accounting fees, employee salaries, regular equipment maintenance, etc.) and variable costs (such as shipping and packaging, product production, seasonal worker wages, or emergency repairs). You should also account for one-off costs, like equipment, software licenses, etc.
Thirdly, your business budget will give you a system for evaluating your cash flow. Considering that you'll have an expected amount of expenses every month, your business budget should show how much cash needs to be made available to avoid losing money through your business.
Finally, creating an insightful business budget will help you predict your profits. And though the success of your venture can change at the drop of a hat — think back to how Covid upended entire industries — having an idea of how much you can expect to make can give you valuable information, you can use for planning the future growth of your business.
How to create a business budget
Now that you understand the whys and the whats of financial planning for organizational success, you're ready to get to work.
Here's how to get started with creating a business budget.
1. Examine your current financial situation
The first step in developing a financial plan for your organization is to meticulously examine your current financial circumstances. Identify all your income sources and determine the amount of money that comes into your business every month.
Remember, you're not looking to estimate profits. You're merely trying to calculate your total revenue, identify income streams, and look for potential seasonal patterns. This will help you plan your spending and allow you to put aside some surplus funds that can act as a financial buffer during the slower months.
2. Create a list of all outgoing costs & expenses
Once you've calculated your revenue, it's time to analyze all costs and expenses. First, go through your accounts and collect all the available data. Remember, even the most negligible expense needs to be accounted for, as the entire point of creating a business budget is to avoid surprises (and we all know how quickly small amounts can add up when we ignore our spending).
3. Make an emergency fund for unpredicted situations
As a rule of thumb, unexpected costs will happen when it's the least convenient. So whether your equipment breaks down, packages get lost, or there's an issue with your products that you need to remedy, it's best to be prepared with a bit of cash set aside for such occasions.
By having a contingency fund, you won't just have a way to cover unexpected costs. But, more importantly, you'll prevent these incidents from irreparably hurting your business's ability to continue operating at the level your loyal customers have come to expect.
4. Explore ways to save money
One commonly overlooked aspect of business budgeting is the exploration of saving opportunities. For example, did you know that 33% of all desktop software subscriptions represent spending that's either wasted or underused?
So, if you're already planning your organization's finances, looking for ways to save money might not be a bad idea. For one, consider outsourcing highly technical one-off jobs like software development or low-skill (or simply tedious) tasks such as data entry or transcription.
Furthermore, make sure you use all the free tools and resources you can get your hands on.
Sure, a premium subscription to Adobe Creative Cloud could come in handy. But if you can get the job done just as well by signing into your Free Canva account, then the $85 monthly subscription is nothing but a waste.
5. Set financial goals
Having a set of well-defined (achievable) business and financial goals is one of the keys to building a successful brand. After all, psychological research shows a direct link between goal difficulty and performance. So, if you want to ensure you're doing your best, it's not a bad idea to let your dreams and ambitions act as your daily motivation.
But setting financial goals is not just about where you see your company in two, five, or ten years. It's also an essential step for enabling expansion — particularly if you're looking for investors who can support the growth of your brand.
6. Choose the right collaborators
They say that a chain is only as strong as its weakest link. And, more often than not, the weakest links for businesses are poorly chosen, disengaged employees/collaborators who don't share the founder's vision.
Fortunately, this is an obstacle you can easily overcome. For one, make sure that you choose collaborators — especially those directly dealing with your company's finances, like accountants — who are experienced and whom you can trust to do an efficient and productive job.
Moreover, when hiring employees, ensure a thorough interviewing process so that you don't end up with workers whose expectations greatly diverge from yours.
Finally, remember that having the right team on your side requires continuous investment in their development. So don't skimp on training opportunities and team-building activities. Furthermore, do your best to set an example (even if it only means being diligent about tracking your business expenses).
7. Keep personal finances healthy & separate from your business
The one aspect of company finances no one ever talks about is how owners often sacrifice a significant amount of their personal wealth just to keep the business afloat.
Now, if you're a startup owner, doing this might be inevitable.
Nonetheless, don’t put everything you have into the company. Instead, plan to keep your personal and professional finances separate. Moreover, keep extravagant spending (both at work and at home) to a minimum. And try to find more responsible ways to build your wealth, for example, by investing in reliable dividend paying stocks, diversifying your business portfolio, and, most importantly, doing your best to pay off debt and start saving money.
8. Monitor your finances and adjust your budget as needed
Lastly, as you embark on the journey of creating and sticking to a business budget, remember that not everything will go according to plan.
But, regardless of whether the unforeseen financial circumstances you encounter are positive or negative, you need to be prepared to adjust as needed. And, of course, remember to regularly monitor your expenses and revenue in real time so that you can make any necessary budget changes sooner rather than later.
- Best Expense Management Software 2023 - Reviews, Pricing, & Ratings
- How to Improve Your Budget Process In 5 Steps
- The Top 6 Financial Mistakes to Avoid as SaaS Startups
There you have it, an easy-to-follow beginner's guide to creating a business budget.
By implementing the tips from this article, you'll be well on your way to ensuring better financial health for your company. And by combining these strategies with the right tools, you'll have even higher chances of turning your organization into a profitable venture.
So don't be afraid of getting down to the nitty-gritty of budgeting. Sure, it may not be what you've always dreamt of doing. But get it right, and you'll see a whole world of professional opportunities appear before you.
Try it out and see for yourself!