You can’t run a business if you don’t have the funds to pay bills, employees, and operating costs. If you spend too much and are left with too little, your business can’t thrive, let alone survive. That’s why having an accurate business budget is so important.
A business budget ensures that you only spend what you can afford. It keeps your expenses in check, while projecting your on-hand cash so you can better see the current state of your business and predict the future state of your business.
If you don’t have a business budget, you need to get started right now.
Follow these eight steps to create an accurate budget for your business.
#1) Commit to keeping a budget.
A budget only works if you create one and stick to it. The best way to commit to keeping a budget is to understand the importance of having one. When you consider the benefits of outlining a budget — and the consequences of not having one — it will be easier to stick to your plan.
Consider the benefits of having a set budget for your business. It helps you:
- Create forecasts for your business so you can get an idea of where you will be in upcoming days, weeks, and months.
- Manage your bank accounts and prevent cash flow issues so you aren’t constantly stressing about how much money you have in the bank.
- Identify ways to cut expenses, increase revenue, and increase profit.
- Secure your business by setting aside money for a rainy day fund.
- Identify available funds you have to put into future spending and growth.
Keep your eye on the prize when it comes to budgeting. Referring back to the benefits to help you stay on task and continue to stick to your budget.
#2) Get your team on board.
It’s not enough for a business owner to commit to a budget. All involved stakeholders need to also make a commitment to knowing and sticking to the budget.
Talk to your team about why you need a budget and how it will help your organization, and get their sign-off and input as you create the plan. Once you and your team commit to keeping a budget, you can begin to lay out your plan.
Related: 5 Budget Tips for Success
#3) Outline your income streams.
To know how much you can spend, start by getting to know how much you have to spend. Outline your income to see how much money you have coming into the business.
List all of the monthly revenue coming into your business. This may include sales, billed work, interest earned, etc. As you identify these metrics, keep a few things in mind.
- Do you have investment income to use? If you have funding, how much do you plan to spend each month?
- How are your payment terms set up? Does a payment take 30, 60, or more days to be paid?
- How long does it take for a payment to actually hit your bank account once it’s paid?
- Is your business seasonal? Do you have bursts of income that need to sustain your business for the rest of the year?
#4) Outline your fixed costs.
Next, begin to outline your costs. Start with fixed costs which are the expenses you know your business will have each month. Fixed costs include:
- Occupancy costs such as rent, utilities, internet, maintenance, and other costs to maintain your office or warehouse space.
- Office supply costs including paper, pencils, pens, printer ink, bottled water, etc.
- Insurance costs which may include general liability, auto, and workers’ compensation insurance.
- Credit card processing if you accept credit card payments. The cost could be anywhere from 2.5% – 4% of your sales transaction amount.
- Software subscription costs that you use to run your business.
- Advertising and marketing costs to fund ongoing initiatives (like a website, newsletter, etc.) and one-time campaigns (like advertising).
#5) Outline the cost of your sales.
While sales lead to revenue, they also lead to expenses in some cases. You may have to spend money to make money depending on your business model. For example, if you offer services, each sale may lead to labor costs. If you sell products, each sale includes the cost to build or buy the product you sell to your customers.
As you identify these metrics, keep a few things in mind.
- What is the outlook on raw materials used to produce the products you sell?
- Do your key vendors plan to increase prices during the next 12 months? If so, by how much?
- How much inventory do you need to keep on-hand? Can you get discounts by buying in bulk?
- How much does it cost to package and ship your products?
#6) Outline your employee costs.
Employee salaries and benefits are often the largest expense incurred by small businesses aside from their cost of sales. Consider how much it costs to fund your current staff, and project costs for future hires if you plan to expand your team.
Employee costs include:
- Salaries and wages
- Payroll taxes which include the employer portion of Social Security and Medicare (currently at 7.65%, federal unemployment (currently set at 6% of the first $7,000 of wages), and state unemployment
- Benefit costs such as health care and dental insurance)
- New employee supplies such as computer costs, desks, new users in software, etc.
#7) Plan for one-time expenses.
As you lay out your budget, consider if you are going to have any upcoming, one-time expenses. One-time expenses might be something like a new machine or cost for a consulting contract.
If you don’t foresee any one-time expenses, set aside money anyway. You will likely have expenses you didn’t plan for.
#8) Fit your expenses within your budget.
Once you have all of your expenses listed, compare it with your income streams. Do you have enough income to cover your expenses? If not, what expenses can you cut out? How can you generate more revenue to cover your expenses?
The budget you created will help you identify where you are in your business and where you need to be to lead your business to survive, thrive, and increase profits.
Build a budget for your business today.
Follow these eight steps to create a business budget that accurately projects your revenue and expenses. Stick to the budget and use it to make projections for your business, control your finances, and create a path to more profit and growth.
If you need help going through this process, check out our Free Small Business Financial Planning Guide. It walks you through creating your expense list as well as your sales forecast so you can create even better projections for your business. Download it for free and start building your plan today.
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