Operating a successful business is no easy task. It requires a great deal of time, energy, and extensive planning. One of most intimidating, yet essential, tasks that a business owner will undertake is the creation of a business budget. Even the most seasoned entrepreneurs dread it. Even so, they understand that creating and sticking to a business budget is critical for the company to succeed and grow.
While you can create a business budget on your own, it might be advantageous for you to work with one of our accountants or business consultants. We can help you collect, interpret, and work with your business budget figures.
What is a business budget?
Simply put, a business budget is a company's documented financial plan for a specific period of time. It involves forecasting future sales, revenue, cash flow, expenses, and liabilities. These figures are based upon the company's past performance as well as current and predicted industry trends. In most cases, business budgets are generated annually, however, monthly, quarterly, and semi-annual budgets are also commonly used.
Six steps to creating a business budget
- Collect relevant data
The first step in budget creation is to collect the company's financial data. You'll need the company's bank statements, receipts for purchases, previous year's tax documents, and sales records. If you're using accounting software, everything you need should already be input so you can access the data easily. However, it's a wise idea to double-check to ensure you don't miss anything.
- Calculate your revenue
The first thing that you want to look at is the amount of revenue the company generates every month. This is the total amount of money made from sales an any other income sources, even if they're not your main business activity. You'll want to calculate twelve months’ worth of revenue at a time.
- Calculate your fixed costs
The next step is to determine your business's total monthly fixed costs. Any expenses that you pay out regularly like rent, depreciation, payroll, taxes, and insurance fall under the fixed expenses category. Since they are usually the same from one billing cycle to the next, calculating them for a year is fairly easy.
- Calculate your variable costs
Your business will likely also have variable costs that change from month to month, or that occur only occasionally. Utilities, advertising, materials, supplies, and your own salary are good examples of costs that vary. Discretionary expenses such as education and training should also be included in your variable cost calculations.
- Plan for the unexpected
Life isn't always predictable, and unexpected expenses pop up at the most inconvenient times. If a computer crashes, company vehicle breaks down, or a vital piece of equipment needs to be repaired or replaced, finding the cash to solve the problem can be difficult. Avoid this situation by budgeting a set amount each month as an emergency fund.
- Finalize the figures
This last step is the easiest since all the hard work has already been completed. What you want to do is to create a Profit & Loss statement (P&L) so you can get the big picture of your monthly business finances. Although it sounds like an intimidating process, it's really quite simple. First, list the revenue that you calculated in the second step. Next, subtract your fixed, variable, and emergency fund deposits from that total. The number that you end up with will either show a profit, or loss for the month.
Using your business budget
It's all well and good to go through the motions to create a business budget, but without action, it's simply another document. A well-executed financial plan will help you see where you can improve, what you're doing right, and guide your decision making in the future.
Manage expenses and reduce costs
When costs are left unchecked, it cuts into the company's profit margins and creates financial distress. A business budget helps you see what you're spending and allows you to make adjustments to reduce costs and maximize profit. Prioritizing expenses, eliminating unnecessary costs, and reducing necessary costs are much easier with a solid financial plan in place.
Get a handle on the business
Understanding your company's complete financial picture is essential. That means taking everything you've learned from your budgeting exercise and evaluating it thoroughly. Perhaps one or more of your revenue streams are weak, seasonal sales might be able to be boosted in some way, or certain functions should be eliminated. These decision-making tasks are much easier when you plan ahead.
Review and update your business budget regularly
Creating a business budget is not meant to be a one-time activity. It's actually something that you'll want to regularly review and update on a regular basis. Your company's financial situation will fluctuate over time, and you have to stay on top of it to maintain control. At a minimum, you should be reviewing your budget once a year, however, it might be in your best interest to do so on a monthly basis. Creating and sticking to a business budget is vital to your company's success. If you haven't created one or you haven't reviewed your budget for a while, don't wait until problems arise to do so.
If you have questions, or you'd like some help setting up a budget and managing it, reach out to us. Our expert staff has the knowledge to not only keep your business running but also help grow it.
We create vital financial reports, financial forecasting and modeling for your business.