How to create a small business budget
Tips / 24.09.2021
If you’re a small business owner and numbers are not your strong point, we’ve got good news. You don’t need to take up a bookkeeping or accounting course in order to prepare your business budget. Although the numbers might seem overwhelming, it’s vitally important that you stay on top of your finances, or else, they’ll get the best of you. This is why knowing how to prepare your small business budget is vital.
Table of Contents
- What’s a business budget?
- Why is a budget important for a business?
- Uses of a budget
- Benefits of budget planning
- Steps to budget planning
What’s a business budget?
So, what is a budget? In simple terms, it’s an evaluation of your income and expenses, recording them, analysing them and preparing a forecast to help you make sound financial decisions for your business now and in the future. This small but vital step will help you keep track of your expenses, see where you can cut them down and overall, help you manage your most important business resource better – your money.
Why is a budget important for a business?
Now you might be wondering “why is a budget important for a business?”, and the answer is quite simple. It’s threefold actually.
Firstly, it will help you estimate your earnings going forward. Essentially, this is a projection of your anticipated income.
Secondly, a budget can help you plan for your expenses. You’ll have a good reason for each cent you spend and nothing will go unallocated properly.
Finally, a budget is important for any business – small or large – because it helps you to stay accountable. This is one way of ensuring you’re meeting your goals and expectations.
Uses of a budget
There are so many uses of a budget. Here are a couple of them:
- Create a financial road map: this road map will help you make sound financial decisions as it helps you determine where you are now and whether you’re on the right track to achieving your goals in the future.
- Increase profitability: by determining where you can cut down on expenses and increase your revenue streams, you’re one step closer to improving your levels of profitability.
- Helps you get better funding: a clear budget that’s detailed enough and contains accurate forecasts and analysis will be a strong stepping point for times when you seek to apply for loans or funding.
- You’ll be able to see the bigger picture: when you put everything down on paper or even a spreadsheet, you’ll see where your expenses are channelled and where your income is coming from, enabling you to get a comprehensive look into your business’s finances.
- Set goals: having a budget can also help you set realistic goals as you’ll know realistically where you stand now and where you expect to be in the future.
- Improves your accountability: sticking to a budget will help you stay more accountable as you’ll be much more cautious when you spend and be more responsible with your earnings.
- Save money: in the long run, sticking to your budget can even help you save money as you’ll be able to identify where your variable expenses are going and see if you can cut down on them.
- Pinpoint poor habits: there are some expenses that are just not needed but you make them anyway. This can lead to poor financial habits that you can avoid.
- Avoid overspending: another plus to budgeting is that it can help you avoid overspending. This is because you’ll know your limits and boundaries and will (hopefully) stick to them.
Benefits of budget planning
Ultimately, what is the purpose of a budget if it doesn’t offer you any benefits? In addition to what was mentioned about the uses of a budget, a budget can help you with the following:
- Set proper limits
- Reach your financial goals
- Build wealth
- Control your finances and your business better
- Reduce uncertainty
- Predict and anticipate future revenue growth
- Predict challenges and prepare for them
- Improves decision-making processes
- Offers clear insight into your goals
- Streamlines your business operations
- Foresight to reinvest where possible
- Keeping you away from debt
Steps to budget planning
Now that you know why a budget is important for you, it’s time to determine how you’ll go about creating it.
Here are the main steps in the process:
- Identify all sources of income: once you’ve done this, add them up to get a final figure.
- Identify what your fixed costs are: these can include things like rent, utilities, a telephone line, software, website hosting etc.
- Identify your variable expenses: these are expenses that come and go and can even be seasonal. Make sure you add them up as well
- Compare your income versus your expenses: what is the total that you get? Is it a negative balance or a positive balance?
- Create an emergency fund: to be proactive, consider putting some funds away for an emergency in the future.
- Planning, planning, planning: make sure you follow these steps on a regular basis to see if you’re on track.
Creating a budget for small business doesn’t have to be rocket science. Sure, you might not find the process much fun, but you’ll certainly enjoy the rewards once you’ve created your budget, stuck to it and see the results of increased income and decreased expenses. Increased income can be reinvested back into your business, saved up or even put into a separate emergency fund. Meanwhile, while not all expenses can be decreased, some can be eliminated altogether and you can see where you’ve been throwing away your good money. This all stops though with the creation of your budget.
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