How to Create Your Small Business Budget
Budgets are very useful for every business because they can give you knowledge and insight that you would not have had otherwise. If strictly followed, they can help you identify and reduce wasteful spending, and get you on track to profitability. They can also help you identify if any seasonal trends in your business exist, and will also help you analyse how successful your business decisions were.
Creating a small business financial plan or budget can be very daunting for business owners who have not done it before. Some just think that they can guess their numbers and roughly pull together a budget in 15 minutes. Unfortunately, if you want to create a realistic budget that can show you whether your sales are on target and help you determine how much money you can reinvest into the business, then you need to get into the nitty gritty of the numbers.
Thankfully, you only have to do this once a year, and it becomes easier with every subsequent budget. However, if you want to be a bit more specific, you could make a new budget every month or quarter.
Profit & Loss Estimate
Like with a profit and loss statement, you will need to start calculating all your income and expenses. However, instead of looking at the year that was, you will be forecasting what you think the next year will look like. If you have been in business for more than a year this will be easier to do as you can use the previous year as a starting point. The best way to do this is on dedicated small business accounting software or, if you don’t have that, an excel spreadsheet.
First, calculate your fixed costs like rent, insurance, utilities, pre-paid services and salaries. These costs are not going to change throughout the year and should be quite easy to work out.
Secondly calculate your variable costs. These are the costs that are not fixed and will change throughout the year. A lot of these numbers will be an estimate, which is where you can use previous financial statements to help you. If in doubt, estimate the maximum amount you would expect to spend. If you over-estimate your costs then that is a bonus at the end of the year.
Next calculate your expected business income. Be realistic with your estimate, but err on the side of caution. You may want to double sales from the year before but that is highly unlikely for most businesses. It pays to be cautiously conservative with your small business financial forecasting.
Finally, calculate the difference and hopefully you will end up with a surplus. If not, consider adjusting your variable costs and removing expenses that are not required.
Cash Flow Estimate
Many people will only consider the profit and loss calculation when creating their small business budgets. However, these don’t forecast liquidity. Therefore, while you may still be on track to make profit you may not have the necessary small business cash flow to meet your expense obligations.
A cash flow estimate does exactly what it says. It is an estimate of how much cash is flowing in and out of your business, and when this is likely to occur.
The best way to calculate this is using software like Cashflow Manager Cloud. The software will create a 12-month cash flow budget for you. As you input your financial data, it automatically updates the budget so that you can track it in real time.
This is the only way to determine if you have enough money to pay for any large assets or new staff. It can also advise you on when it is best to save money to cover any future shortfalls.
Identify Business Goals
The next step is to identify the financial goals for your business. Do you need to save money in order to purchase large assets in the future? Do you want to expand your business and require investing in the business? Do you have debts that need paying back? These will help you structure your small business financial plan: decide what you do with your money and how you want it to be spent throughout the year.
Set Budgets to Achieve Each Goal
Now you are ready to finalise your small business budget for the year. Think about how much profitability you are expecting throughout the year and what your business goals are. When determining when to pursue your goals, keep in mind your cash flow budget to ensure that you don’t choose a time that would be bad for your business.
If the numbers don’t quite add up, consider going back to your profit and loss estimate and adjusting some of your variable expenses. You could also model what would happen if you increased the prices of certain products or services, or sold a large business asset.
Yes budgets. Multiple. If you have the time and patience, it is better to complete a couple of budgets, each being modelled on a different foreseeable scenario. For example, one budget could factor in favourable exchange rates for exports, whilst another predicts that a product launch is not successful.
These different budgets can have big differences between them to reflect the large impact of the scenario you are predicting. For low impact scenarios that would only need a small adjustment to your budget, you can wait until they occur and then adjust your budget accordingly.
As the year goes you should adjust your budget as you go. It is impossible to create a completely accurate yearly budget. Adjusting it throughout the year will keep you on track.
For more information and advice on running or growing a successful business, browse our small business guides & resources.