What would happen if an engineer started constructing a building without making a blueprint? Just the thought is scary, isn’t it? A budget is a financial blueprint – an outline that guides the direction in which your small business will develop over the course of the next few months. A business budget is essential whether your personal money matters or your small business’s finances. Why? So that you can make calculated, rational decisions regarding the growth of your business activities based on the money you have in hand. Only once you know the money in hand can you decide how to spend it to meet your short and long-term goals.
How to Prepare a Business Budget?
But how does one go about preparing a budget? Here’s a step-by-step guide to get you started with making a proper budget for your small business.
1. Calculating Revenue: How Much Do You Earn?
The very first step to creating a business budget is taking stock of all your sources of income. List down the various avenues through which your small business earns revenue, including the money you make from selling your products and returns on investments made for the business. Since you’re making the budget for future purposes, you’ll have to rely on past data for calculations. Once you have listed all the income sources, calculate the total and the monthly revenue earned from them.
You’ll notice that the revenue for every month is not the same. On closer inspection, you might find a pattern in revenue inflow. Some months tend to see a heavy inflow of money as the business is “in season.” In other months, the inflow of money is slow. Identifying these patterns is important so you can keep some money aside for the slow months in your budget without compromising on the “in-season” months. This financial cushion goes a long way in ensuring your business remains stable even in the lean period.
By comparing the past data, you can also make an average estimate for revenue projections in the future. And if you are a recently launched business, you can use the past data of your peers as a base for your budget estimates.
2. Totalling Expenses: How Much Do You Spend?
Once you know how much money to expect in revenue, it’s time to list all your business expenses.
Business expenses are of three types:
(i) Fixed costs: These are the costs that remain the same irrespective of how much your business earns. These include rent, debt repayment instalments, insurance, property tax, employees’ salaries, and more. Some of these may be weekly or monthly expenses or even annual expenses. So make sure you include them all.
(ii) Variable costs: These costs fluctuate per your business cycle. These include utility bills (which change according to your usage), spending on raw materials (which will be higher when business is good and lower in the lean period) and even the hourly wages of certain employees.
(iii) Capital costs: It is a one-time spending to earn more revenue, like buying new machinery or a new building for your business. They are usually heavy costs that are only made once in a while. Nevertheless, they must be taken into consideration while preparing a budget.
Setting aside some amount as an “emergency fund” for unexpected costs, such as replacing equipment due to a sudden breakdown, would also be prudent. This natural calamity could affect your business or even a break in supply chains due to unforeseen circumstances such as wars or floods.
3. Profit or loss?
With this data, the next step is subtracting the estimated monthly expenses from the monthly revenue. The resultant amount indicates how much money the business has left to run its small business for the coming few months. If this figure is positive, it indicates a possible profit; if negative, your business could face a loss. However, such profit and losses are a part of the game. As the owner, it’s up to you to determine how you handle your expenses and other factors to pivot and make a profit.
4. Handling suppliers and customers
A business budget is basically about gaining a delicate balance between your income and expenses. To achieve this balance, you, as the owner, can tweak your business activities per your requirements. For instance, you can negotiate with your suppliers and look for a better deal to reduce your expenses. At the same time, making sure customer payments come in on time is also essential. These factors help ensure that your small business enjoys a smooth cash flow, leaving you with enough money to allocate to business growth activities.
5. Setting Business Goals
Now that you have determined how much profit (or loss) your business might earn, you can set realistic short- and long-term goals for expansion. If the business shows seasonal fluctuations in revenue, you can also think of strategies that will keep your products or services in demand all year round. Allocating a part of the budget for such R&D and consumer surveys can help take your business to the next level.
If you want to set up a new manufacturing plant or office, you can refer to your budget to see exactly how much you need to earn and how much time is required to achieve this target. You can then strategize and innovate your business activities to ensure your goals are realized comfortably. You can also think of many ways to cut costs and invest with specific goals.
Business budgeting involves a great deal of number-crunching and research. For first-timers, it is always advisable to get an expert to help with the procedure and make realistic budget estimates. Even for established small business owners, roping in a specialist can give you fresh insights into taking your small business to the next step.
Contact Ford Keast LLP in London, Ontario, for Your Business Consulting Needs
A skilled business consultant can help you prepare a realistic budget and identify gaps. In the meantime, an accountant/bookkeeper can track the expenses to help the business revise its budget estimates. To learn more about how Ford Keast LLP can provide you with the best counselling and accounting/bookkeeping expertise, contact us online or by telephone at 519-679-9330.
