A budget is a document that projects a business’s future sales, costs, profits and cash flow. It’s a vital business planning tool. Without a budget, it will be difficult for you to know how well (or poorly) your business is doing.
Business budgets help you:
- Project startup costs if you’re beginning a new business
- Determine how much money you need to earn to break even and earn a profit
- Estimate your business’s cash flow so you know whether you can meet expenses and fund new projects
- Figure out what changes you need to make to have a profitable business by comparing budgeted vs. actual performance
- Predict slow months so you can plan for them
- Identify leftover funds you can reinvest
- Obtain a business loan from a bank or other from a financial institution, or equity funding from investors
How to create a budget
Your budget should cover at least one year and include monthly income and expense projections.
Here are six steps to creating a small business budget.
Step #1: Gather financial information
To create a budget, you must project future revenue and expenses. The best way to do this is to look at your business’s past performance.
If you have an established business, look at your most recent financial statements. These statements should include an itemized list of the fixed and variable expenses you incurred during the year. If you lack such statements, go through your income and expense records and bank statements for the prior year.
Use these numbers as a starting point to project your revenue and expenses for the next year. You’ll likely need to massage these numbers. Do you expect your business to improve? You may need to increase your revenue projections if you expect to add new customers or clients, or you plan to raise your prices.
If you’re starting a new business, you’ll need to do some research. Gather financial information for companies that are similar in both in size and type. There are various ways to do this:
- Ask colleagues who have established businesses for help—what did they earn during their first year?
- Use the practical knowledge you gained working in the field for other businesses
- Perform market research
- Factor in how many clients or customers you’ve already lined up and how much more business you can reasonably expect to attract
Armed with this information, make your best estimate of what you’ll earn. Don’t be overly optimistic. But, remember, this is only an estimate.
Step #2: Add up all your revenue sources
How much money do you expect your business to earn? Revenue sources can include:
- Hourly earnings
- Product sales
- Investment income
- Income from asset sales, and
- Loans
Step #3: Determine fixed costs
List and add up all your fixed costs. Fixed costs are expenses that remain the same every month. Common examples of fixed costs include:
- Office rent
- Leased furniture and equipment
- Cell phone
- Bank fees
- Accounting and payroll services
- Business vehicle leases (or loan payments if for purchased vehicles)
- Business loan payments
- Business insurance
- Business licenses
- Subscriptions and dues
- Employee salaries and benefits
- Property taxes
- Website hosting expenses