We are fans of spicy, unpopular opinions… like making a business budget is better than a night of wine and true crime.
Eww, you say? Why in the world would I need one of those? You’d change your view if you knew a thing or two. Give a business budget a chance! Like a medium or psychic, it gives you a reading on revenue and expenses. Then, like some kind of small business sage, you can confidently forecast your next move with confidence. It’s basically a tarot card reading of what your business looks like by revealing the areas that need work. Having this knowledge helps your decision-making to ensure that your outlook is good.
A business budget is so much more than what you should be spending and saving. It lets you know when it’s time to employ or let go of staff, as well as purchase new assets you need to grow and compete in your industry. Are you investing in enough marketing? Your budget will tell you exactly when it’s time to purchase that billboard to reach new customers. A business budget is a beacon or lighthouse (minus Willem Dafoe) that guides you through the storm, revealing which goals you should focus on and shedding light on the aspects of your business that need improving. Fear not! This journey need NOT be complicated or arduous. We’ve put together some budgeting tips to keep you on path. Stay close now, and we’ll lead the way.
How to Create a Business Budget in 6 Easy Steps
Wait! Before you walk away and turn on the murder-cast you’ve been listening to, follow along for a bit. When you create budgets, you will see it’s something you can’t live without (like water, air, chips, and salsa). You begin looking at your records of previous expenses and income differently. It’s slightly easier if your business has been around a while because you have more data to work with. If you’re a new kid on the block, you will need to look at other business models within your industry.
Don’t dance around this, Marky Mark! The more research you do, the more detailed your business budget will be. This process serves as a financial projection and gives you something exciting to look forward to. Let’s break it down. Mapping out a business budget is simple when you have the know-how. The business budgeting tips that follow will keep you in the game:
1. Take a Close Look at Your Revenue
What’s bringing in the Benjamins? We need to find exactly what makes your business tick over. Then, and only then, can we start building our business budget. Add the figures from each revenue stream together, and we get a picture of what your income is per month and annually. These numbers are pre-deductions, which means that revenue or turnover is your gross earnings. When you subtract your total expenses, you are left with the profits.
Take yourself back 12 to 24 months and be thorough. Note any patterns you find in your analysis. Become familiar with the ebb and flow of your income. Is it affected by seasons and holidays? This helps to make compensations and plan for when the going gets tough. You will notice that these seasonal changes influence different industries in various ways. If you are new to the game, study the competition (as if you’re in the running to be the next Iron Chef). Learn from their weaknesses, so you aren’t hurt in the same way.
For example, your archnemesis flower shop has a succulent deal all year round. You feel thorny for not offering one as well. However, after much research, you’ve found that this offer hasn’t grown their business. Luckily, you avoid making the same mistake and blossom! Crisis diverted. *round of applause*
2. Deduct Recurring Costs
Next, we need to find out what your running costs are. What expenses keep the lights on and the wheels turning. Get used to them because they sure aren’t going anywhere. Fixed costs can be deducted each week, month, or they could also be an annual affair. Gather as much information as possible and consolidate the recurring costs. You need to know the total for each year so you can plan around it.
Some of these costs may be:
- Revolving credit or debt repayments
- Paying your suppliers
- Asset maintenance and depreciation
Remember, you are a beautiful and unique snowflake. Every business is different. You will have a completely different set of costs that will reflect the nature of your business. So, keep these budgeting tips in mind when you calculate your fixed expenses. Go in on this process! Make sure you carefully note each detail. The more accurate these figures, the better your business budget will be as a result. When you have totaled up your fixed costs, deduct them from your overall income. You can then proceed to the next stage. Keep on trucking, people.
3. Discover Your Variable Costs
Certain costs don’t recur. You probably found this while gathering data in the previous step. Kudos for noticing! These are known as variable expenses. They may be one-off costs, but they certainly aren’t random. Variable costs occur according to what stage of growth your business is in. This makes them just as important in running your company as recurring costs and equally important in creating your business budget.
Some of these costs will be essential in the operation of your business. Others may come as a result of enhancements or upgrades to different areas. A successful business owner knows when to pull the trigger here, as the financial risk can be enormous. Discretionary costs, as they are known, also fall under variable expenses in your business budget. You might need to pay for an employee’s education or try marketing on a new platform.
Some more instances of variable costs could be:
- Employee development
- Upgrading equipment
- Marketing costs
- Supplies and Utilities
- Paying your own boss self as the owner
These costs will need to be kept to a minimum in quieter months. Especially, with discretionary expenses. You might think, “Now, here’s a clever tax write-off!” but that doesn’t mean it’s essential to buy it right now. Be smart! Prioritize your spending carefully, and when you see profits, feed those flames. Reward your business in the good times and watch it grow. Acquisitions and developments can take you to the next level.
4. Emergency Costs
What if a pandemic came along and you had to shut down your business? Imagine that! Unfortunately, we have all found that the entire world’s economy can shift without warning—pandemic or a video game store stock price. The consequences for all of us were simply huge. One-off expenses are unpredictable and inconvenient, so we need to budget for them accordingly. Your equipment inventory and company vehicles might not be comprehensively insured yet, so include this in your business budget and keep funding aside. Machinery does fail, so make sure you’re covered, and this won’t bring your grind to a screeching halt.
Surplus revenue is tempting but play it safe instead. Always prioritize emergency expenses over variable discretionary spending. This means when a crisis strikes, you can react immediately. A natural disaster could cause flooding or other damage to your building and its contents. Insurance claims not only take time to settle, but you will need to cover the excess.
So, keep this cash aside to cover and stop-gap in these crazy times. Taking out a loan is an option better used as a last resort. So have a plan in place instead. According to the British, Murphy’s law says that “anything that can go wrong, will go wrong.” The chances are that the emergencies we budget for may never arise. This is a good thing! It’s always better to be prepared.
5. Profits & Losses
These are the hard, cold facts. Are we winning? It’s important to take this news in your stride as a business owner. Success in business doesn’t happen from ignoring factual information. Once you have gathered all the necessary data from your various revenue streams and calculated expenses, you need to create a profit and loss statement. This is simple addition and subtraction, folks. What’s more, you can even get help from your trusty accountant or bookkeeper. *hey, there*
Add together your revenue for each month. Do the same for your expenses. Then deduct the costs from the revenue, and you will get either a positive or negative number. A positive number means your business is profitable. Congratulations! Don’t sweat if you aren’t there yet, though. Small businesses often run at a loss while consolidating in the first two years of operation. Good or bad, take the news positively and do something about it. Take immediate action! Profitable or not, your business needs work, and now that you have the information, you know exactly where to start.
6. Create Your Business Budget
Whether you’re new to the game or a seasoned vet, making financial predictions is a trip, fam. Even at the highest level of actuarial data science and algorithmic mapping, it still amounts to an educated guess. However, the amount of time, effort, and money you invest in this process will determine just how accurate this guess will be. The longer you have been in business, the more data you have to analyze and find trends.
Your profit and loss statements are incredibly important. By connecting the dots, you can quickly map your company’s growth. If you want to attract partners, investors, or even outright buyers – this is the way to impress them. Numbers don’t lie, and results speak for themselves. Your company may not have been profitable initially, but this shows if you DID something about it. Use your profit and loss statement as a reference when creating your business budget.
Look out for these patterns:
- Supply purchases or equipment acquisitions that don’t create profit
- Dips in revenue from economic turmoil, natural disasters, or drought
- A sudden unexplained rise in profits compared to past years
- Fluctuations according to tourist activity, school and university calendars, or a shortage of supplies
Why do the profits differ from last year? Always look for reasons BEHIND the numbers.
Creating a business budget is not as formulaic as you might think. Unfortunately, it’s not as simple as mixing up a pitcher of mojitos. You get results from being thorough and implementing changes to your business. By constantly reassessing and readjusting, you ensure that you will grow over time. Making a profit is NOT a finite state. Things can change in an instant. So be prepared and remember there are people who can help you with each step of the process.
*that’s us* Alchemy Accounting can advise you on how to go about building a business budget or planning for its future. Anything is possible with the right team, and we have a range of services to suit your business. Here’s to you, friend, cheers! *clink*