“Budgeting is not just for people who do not have enough money. It is for everyone who wants to ensure that their money is enough.”
Therefore, budgeting is essential to improve the financial health of your business. Establishing a business involves a lot of expenses in different areas, like marketing, building websites, or finding new clients.
Promoting an effective digital presence can bring your brand or products to millions and can turn them into potential customers. But all you need to make your business sustainable is a solid business budget. Thinking about how to create a business budget? Go through this blog to know more about this!
Do you find it complex to figure out your business budget? So, let’s first discuss what it is!
What is a Business Budget?
A business budget is an action plan that frames your business finances and goals. Business budgeting tracks expenses over a specific period of time and estimates the organization’s revenue to help in fiscally significant decision-making. It assesses specific operational areas to monitor the cash flow both inward and outward, which in turn helps to achieve long-term financial goals.
Budgeting is key to the financial growth of a business. But there’s more to it, keep reading!
Why is a business budget important?
Business budgets are created to monitor the business finances and track the cash flow. The data retrieved from the current financial status would help you to decide the future goals of your business finances. Let’s now understand why this is important.
To make wise financial decisions:
A business budget is a financial road map that helps you to meet your financial goals. Various financial decisions are based on the business budget that you create.
Helps to identify the financial strengths and weaknesses:
Creating a business budget gives you a detailed insight into the financial status. It also helps you to understand where you need to grow or where you need to cut down your expenses. A business budget gives a clear image of your business strengths and weaknesses.
Helps you to grow your business by bringing in more funding:
To grow your business you need to have resources that would help you with funds. It could be any kind of investor or a bank loan even. But you need to have a proper budget outline to get your funding request approved.
Just as the business types vary so dies the budgeting techniques. Check out which one fits your type in the section below!
What are the types of budgeting types for different businesses?
Budgeting techniques need to be tailored according to the business types. Here are some of the businesses with their budgeting processes.
Small business:
Small businesses can have 250-1500 employees depending upon the type of industry. Small business budgeting helps to consider all possible scenarios and build several scenarios whether best or worst. Whatever the case may be, whether business taking off or slowing down you have an immediate plan of action to take for small business
Enterprise business:
Enterprise business comprises hundreds of employees and is a large corporation with several departments. In enterprises, budgeting is done in every department to have a specific financial budget. Therefore, this process involves the participation of different departments.
E-commerce business:
In this business type, the main factor to be considered is the shipping cost. Therefore, while framing the budget the shipping cost plays an important role as it’s a fluctuating factor. Moreover, the size and shape also need to be considered while budgeting as well.
Seasonal business:
Businesses that deal with high and low season markets need to pay special attention to budgeting. Careful financial planning is essential to keep your goals on pace throughout the year.
Startup business:
Budgeting could be an ordeal for startups, as they don’t have an income base or expenses estimation. For such cases research well, take help from business owners or friends for estimating expenses.
Inventory business:
Take a look at previous sales or the average of 12 months to accurately estimate the future demands. This would help in having a clear idea about high and low sales months. Moreover, track the shipping and product cost while budgeting before ordering the inventory.
Service business:
For such businesses there is no physical product practically and hence, your estimations will be completely based on sales projection, amount of workflow, productive hours, and consultation costs.
Custom order business: For this business type, time and material is an important factor. Besides, take deposits to ensure payment if someone backs out in the middle.
There is no rocket science involved in creating an effective business budget. You can get it done in just 5 simple steps. Here’s how!
How to create a business budget in five simple steps
By now you have come to know why a business budget is beneficial for the growth of your business. Let’s understand how to create a business budget
1. Consider all your income sources and tally them
While creating a small business budget figure the monthly cash flow. Consider all the sources that bring in revenue and the expenses as well. Tally them all together to have a better understanding. To have a clear insight into the cash flow bookkeeping is a must which will help you understand what are the probable sources of income. Instead of manual budgeting, going digital would be a smarter move.
2. Determine the fixed costs
Once you have tracked your monthly income it’s time to handle the fixed cost. Fixed costs are those expenses that remain the same from month to month. This generally involves your overhead costs like rent, payroll, website hosting, and other utilities. Review all your expenses and add them together to get your fixed cost.
3. Include the variable expense
Keeping a check on variable expenses is vital. Variable expenses include shipping cost, travel, electricity, specifically usage-based utilities. This cost amount does not remain the same every month. Hence, tally the variables expenses every month to have a clear idea as to how this fluctuates with months and impacts your business performance. If you gain more profit you can invest more in variable costs to scale your business faster. Similarly cut down on these variable costs when profit gain is low to reserve your fund.
4. Consider one-time expenses
Predicting the one-time expenditure would save you from a sudden financial burden. Certain costs may be fixed or variable but take place once or less frequently than others. Do remember to take those into account. Moreover, also add a buffer to cover the unplanned expenses as well, so that you can be prepared whenever an expense pops up.
5. Sum it up all
When you have got all the information sum it up to get a comprehensive view of the financial status of the current period. Eliminate the total expenses from the total income amount to get the gross income amount or the profit. This will help you to make financial decisions and help you to invest in the required fields.
Let’s take an example for better understanding:
Let’s calculate the income first:
Hourly earnings:
Client A- $4000
Client B- $6000
Client C- $7000
Client D- $3000
Product sales: $2000
Investment income: $700
Savings: $1000
Total income: $23,700
Now comes the expenses:
Fixed cost:
Rent- $1500
Payroll- $6000
Website hosting- $60
Insurance- $70
Legal services- $80
Bank charges- $20
Accounting services- $120
Internet- $60
Phone bills- $50
Total fixed expenses= $7960
Variable expense:
Electricity bill: $150
Gas bill: $60
Water bill: $140
Transportation: $40
Raw materials: $300
Digital advertising costs: $950
Contractor wages: $600
Sales commissions: $3,000
Printing services: $200
Total variable expense= $5440
One-time expenses:
Office furniture: $600
Office supplies: $350
New time tracking software: $650
Total One-time expenses= $1600
Total expense= $7960+ $5440+ $1600= $15000
Total net income= Total income- Total expense= $23,700- $1500= $22,200
This calculation will give you a clear sense of the monthly profitability of your business. Moreover, this will also help you to cut down on some expenses if your profit drops. Ultimately, you need to run your business and gain decent revenue to keep it going smoothly.
A financial roadmap helps to set goals, determine priorities, and eventually leads to higher profits. As per the Bureau of Labor Statistics about 20% of businesses daily in their first and almost 50% in thor fifth due to lack of business budgeting.
If you don’t wanna be one failing, keep in mind the below points!
How to improve the business budgeting process?
Budgeting steps may seem complex and overwhelming, but there are strategies that can help you budget more efficiently. The following tips would help you improve your business budgeting process and business health.
- Take help of financial advisor: Hiring in-house attorney or financial advisor/consultant to get help regarding business budgeting and taxes.
- Utilize budgeting software: Getting budgeting software can save your time and make tracking expenses simpler. Moreover, this software even eases your profit and loss statement-making in just a matter of a few minutes. Get one that fits your business!
- Plan out the internal processes efficiently: Set up internal processes efficiently so that every financial data is documented and organized. This would help you in budgeting and tracking your expenses easily.
Final thought!
It may seem tedious or troublesome while you create your budget. But it’s worth the extra effort you invest in. Budgeting gives you financial insight that helps your small business to prosper. Take the help of an online accounting tool that gets your work done faster with accurate results.
