By Lidia Staron
Creating a budget can be a daunting task, especially if it’s the first time you’re creating one for your business. However, the actual mechanics of doing this are not so complicated. That said, it’s important to keep certain things in mind to make it a successful one that will help you grow your business and see it prosper.
Victor Butcher, the former president of the Memphis Chapter of the Tennessee Society of Certified Public Accountants says a budget “…it’s like a roadmap for your company. You need the roadmap to understand where you’re going with your business.” But how to create this road map?
1. Figure Out Your Income
Your income will be formed by your sales and any other additional sources of earnings. If you are just starting from scratch with your business, you can make an estimate. However, you should try to be as accurate and realistic as possible.
On the contrary, if you have already been in business for a year or more, then you should study at least the past 12 months. This will allow you to consider any seasonal changes that might take place. For example, if sales increase around Christmas time and suddenly dropped in January, or if you saw more activity during the summer months than during winter. This way you could consider adjusting your budget according to these changes.
It’s better to be conservative and underestimate your income, especially at the beginning, than to overestimate it. Especially because this will affect the rest of your budget, as you will see soon.
2. Determine Your Costs
This is another way to say that you need to know what your expenses are. There are different types of expenses:
- Fixed: Fixed costs correspond to consistent spending. These are things that are going to continue costing you the same for the foreseeable future. Here you can include rent, services, insurance, and more. The best way to check your fixed costs is by checking your prior bank statements.
- Variables: These correspond to the volume of your sales. For example, raw materials, freight costs, commissions, marketing costs, and the like.
- Semi-variables: These are fixed costs, which can turn into variables. This happens when the work volume increases or decreases. Examples of these are salaries, expenses in phone bills, special marketing campaigns, and others.
3. Factor In One-Time Expenses
These are usually unpredictable expenses, such as replacing a computer that broke down. However, they can also refer to a planned expense, such as attending a work-related conference. These are not included in your other costs because you should have a special fund solely destined for any one-time spending that might arise.
4. Determine Your Profit
Your profit is the result of subtracting your costs from your income. This is the actual money you’re making with your business. Once again, if you’re a brand new business, you can make an estimate, which should be as accurate as possible. To do this, the Small Business Administration recommends doing research beforehand. You can reach out to associations in your trade or bankers to verify your estimated profit.
Even if you’re already an established business, you could make sure your profits are what they should be when compared to other businesses of your size in your industry.
Furthermore, there is the possibility that your balance is a negative one, meaning you’re having losses instead of making a profit. However, this is something that usually happens as your business is getting started. Therefore, don’t see it as a sign of failure or despair over it. What you can do to aid this is to identify the reason, and if necessary, adjust your budget consequently.
5. Keep It Updated
Now that you’ve followed these simple steps to create your budget, you need to follow-up. You should input your monthly expenses and earnings to see if and how they match with your original budget. This way, you’ll be able to consider adjustments. Some of these could be cutting down on variable expenses, or getting personal loans online to make things even if you went over budget. Conversely, if you see that your profit is increasing, you could make timely investments.
6. Use the Tools You Need
You must keep up with your budget. As your business grows, you might find yourself in need of software tools that might help you run things smoothly. Numerous platforms offer reliable results, and they’re designed to be easy to use.
The Benefits of Budgeting
As you can see, creating a budget will allow you to make a business plan that goes in hand with your reality. Despite this, a Clutch survey comprised of 302 businesses found that 61% of small businesses did not create a formal budget. Furthermore, they also found that almost 40% of those who did went over budget during the first quarters of the year.
This tends to happen when the estimates for income and costs are not realistic. However, this analysis allowed these businesses to adjust, which is likely the reason why they didn’t continue to go over budget during the rest of the year. This is the result of keeping your budget correctly updated.
Another benefit of budgeting is that, on occasion, bankers might want to see what your plan is and how you’ve budgeted for it. Having it ready will be one more sign of your preparedness and commitment.
Contrary to what many people believe, it might be a good strategy to let your employees know about your budget. This way, you are giving them a goal to be met, which can increase their motivation and performance.