How to Create a Business Budget in 5 Simple Steps
A business budget is a tool that helps you predict income and expenses to make informed decisions. A budget can be made yearly, quarterly, monthly or weekly.
The first step is to gather information about your historic costs to reliably predict future ones. This includes both fixed and variable costs like rent, employee wages, supplies, etc.
1. Revenue
The first step in creating a business budget is to determine the total amount of money that your company brings in. This is the starting point for the rest of the process and is a critical piece in making sure that the company can afford to meet all of its expenses, as well as make a profit. Ideally, the budget will help you forecast future revenue so that you can make informed decisions about expanding the business or taking on new employees.
Once you have the total revenue for your business, the next step is to subtract the fixed costs from that number. Fixed costs are recurring expenses that do not change from month to month, such as rent, utilities and insurance. It is important to consider all of the fixed costs that your company incurs when calculating its budget, including one-time expenses, such as advertising or equipment purchases.
Another thing to keep in mind when determining your revenue is the seasonality of your business. Many businesses experience a large portion of their yearly revenue in the months of November and December, and a significant portion of their yearly expenses in January and February. These fluctuations should be taken into account when establishing your budget for the upcoming year.
After calculating the total costs of your business, you can then subtract that number from the total revenue to calculate the profit. Profit is the goal of any business, and the profit that your company makes should be enough to cover all of its expenses, as well as allow for growth. If your company is not profitable, you may need to reassess the way it does business or look for ways to decrease its expenses.
2. Fixed Costs
The second step is to take a look at all of the recurring business expenses that your company has each month. These are known as fixed costs and they are generally consistent on a daily, weekly, monthly or yearly basis. This is easier if your business has been in existence for a while, since you can refer back to bookkeeping records and financial statements from the past. If your business is new, it may be harder to anticipate these costs and estimate them correctly. However, it is vital that you tally up all of your business’s fixed costs and subtract them from the total amount of revenue you calculated in Step 1.
While it is not as easy to calculate as fixed costs, it is still important for you to be able to identify and list all of your company’s variable costs. This will help you manage your company’s finances and ensure that profits are made each month. Profits are equal to total costs minus total revenues, so it is important that you do not overspend on any of your business’s operating expenses. The more you are able to control your business’s costs, the higher the level of profits that you will be able to earn each month.
3. Variable Costs
While it’s essential to know how much revenue your business brings in, equally important are the amounts of money going out. Budgeting allows you to see the big picture and take control of your finances.
First, you’ll want to look at all the fixed costs that you have. These are costs that remain consistent no matter how much product your company sells, such as rent, salaries, and utilities. Once you have a clear picture of what your business’s fixed costs are, subtract them from your projected revenue to get a monthly cost figure.
Next, consider any variable costs that may be based on your activity level and volume. These could include usage-based utilities (like electricity or gas), shipping costs, sales commissions, and travel expenses.
When estimating these costs, be sure to include any upcoming expenses that you are aware of. However, don’t overestimate these costs. It’s better to be conservative and have a low estimated amount than it is to overestimate these expenses and leave your business short on income each month.
It’s also worth mentioning that your business will likely experience seasonal patterns and ups and downs in revenue each year. For example, many retailers generate a significant portion of their annual revenue in November and December while January and February tend to be slow months. If this is true for your business, make adjustments to reflect these fluctuations in your budget.
Whether you’re a new or established business, creating a budget takes time and attention to detail. However, with the right tools in place, you can streamline this process and create a budget that is easy to follow. By following these simple steps, you’ll have a clear understanding of your financial health and can focus on growing your company.
4. Income Statement
Putting in the work to create a business budget can seem like a hassle, but the results are well worth it. Thorough budgeting allows you to gain insights into your company’s financial health, ensuring that you are spending less than you earn and making smart investments in the future.
The first step in creating a budget is to calculate your estimated revenue. This is the amount of money that you expect to bring in over a specific time period, and it can include both fixed and variable expenses. Once you have this number, subtract your total costs to arrive at your net income for the period.
If you’re having trouble estimating your variable expenses, try looking at your historical data or industry averages to get an idea of what these expenses should be. Once you have your estimated expenses, you can start comparing them to your actual monthly spendings to see how close you came. You should also include the cost of goods sold (COGS) in your estimate, which is a breakdown of the costs that go into producing and selling products or services to customers.
Once you’ve determined your costs and revenues, you can prepare an income statement to help you track how you’re doing. This will give you a view of your company’s financial health over a specific time period, and it will help you identify any potential problems.
It’s important to remember that a budget is an ongoing project and should be updated on a regular basis. By reviewing your budget regularly, you can make sure that you are staying on track and that you’re on the path to success.
5. Balance Sheet
There are many important things to keep track of when you build a business, and one of them is your company’s finances. Creating a budget is a great way to protect your financial health and ensure that you have the funds to grow your business. The benefits of business budgeting include identifying ways to decrease spending and increase revenue, helping you land funding to expand your business, and providing clarity on your long-term financial goals.
The process of creating a budget starts with estimating your anticipated revenue. This can be done using a variety of methods, including historical data, industry averages, and market trends. You may also want to consider investing in budgeting software, which can help you make the process more efficient and accurate.
Once you have your estimated revenue, it’s time to calculate your expenses. You can do this by reviewing your P&L statement, or you can use a business budget template to simplify the process. There are a number of different types of business budget templates available online, and you can find ones that suit your needs and fit in with your existing accounting system.
For example, if you use QuickBooks Online or Zoho Books, you can pre-fill your budget with actual data from previous periods, and you can view your budget vs. actual performance in an easy-to-understand report. Once you’ve established your budget, it’s important to review it on a regular basis to see how your business is performing and to make necessary adjustments. You can also use a mobile app like Lili to easily manage your business expenses. The app allows you to keep a close eye on your budget, and it also lets you record your sales and income through a SumUp card reader or virtual terminal.