A detailed and accurate budget is key to ensuring that your business is covering its liabilities, managing cash flow and growing sustainably. Creating — and sticking to — a business budget helps ensure that you’re spending money responsibly and using your cash most effectively.
Budgets are meant to be flexible and simple. The best budgets build in assumptions with wiggle room for when market conditions change or if you see a lucrative opportunity. A budget for your business will consider three months ago, last month, then predict the month to come. You can then use that information to help make smart financial decisions. Follow these simple steps to start creating a budget for your business.
[Read more: How to Write a Financial Forecast for Your Business]
Start with your revenue
Your revenue is the amount you expect to make through the sale of goods and services. This is the total income you expect to make over a certain period, usually one month. Identify all your income streams and add them together. For instance, if you’re running a restaurant, you might include sales from in-person dining, deliveries and curbside pickup. If you also sell prepared foods, for example, include the sales from that revenue stream as well.
Existing businesses can estimate revenue by looking at historic sales figures. Use the last three months or the same month a year ago to predict what you believe your revenue will be. New businesses can look at competitor sales and market trends to create the best estimate.
Subtract your fixed costs
Fixed costs are any expenses that are necessary on a recurring basis for the operation of your business. Rent, taxes, insurance, supplies and payroll are all examples of fixed costs. Tally up your total fixed costs for the same time period (e.g., one month) and subtract that amount from your total revenue.
It’s likely your fixed costs are relatively stable month after month. Rent, for instance, doesn’t change from one month to the next, unless you’re beginning a new lease. It should be relatively straightforward to estimate your fixed costs when you base the calculation on last month and three months prior.
A budget for your business will consider three months ago, last month, then predict the month to come.
Estimate your variable expenses
Variable expenses are, as the name implies, costs that may change from month to month. “These can include things like usage-based utilities (like electricity or gas), shipping costs, sales commissions or travel costs,” wrote Freshbooks.
Variable costs are where smart decision-making comes into play. If you forecast that sales will be lower during the coming month, you need to find ways to lower your business’s variable costs. Profitable months with extra revenue allow you to increase variable expenses that benefit your business in the long run.
Put money toward a contingency fund
A contingency fund is like an emergency fund for unexpected costs that arise for your business. If a piece of equipment breaks down, or if you need to quickly replace damaged inventory, a contingency fund prevents the need to take out a small business loan to cover these costs. It can also be considered a savings fund for one-off costs, such as a new computer, for instance. Setting aside money over time for a contingency fund makes it easier to save and helps you maintain financial stability when something happens unexpectedly.
Put together a P&L statement
A profit and loss statement, known as a P&L statement, summarizes all the work you just did. “Add up all of your income for the month and add up all of your expenses for the month. Then, subtract the expenses from the income and hope you get a positive number at the end,” wrote NerdWallet.
If you don’t end up with a positive number, then that’s necessary information to have. Many small businesses don’t turn a profit until their second year of business. This information will help you go back through your budget and see where you may be able to cut costs, especially variable costs. Or, you may consider raising your prices to increase revenue. No matter what strategy you take, this budget will help you see where there may be flexibility for you to plan for the future.
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Published January 14, 2022