For several years when I first started my company I never paid attention to a budget. I knew if I made money by looking at my financial statements and that was good enough for me. Also, every time I tried to put something together I never compared my actual financials to the budget numbers I created.
Two years ago, I decided to take a different approach. I developed a forecast for a quarter of what I expected income and expenses to be. I came up with the figures based on the previous year’s actual numbers. It was easy to look at last year and just add a percentage increase to the numbers. Then I took the time to review once a month the forecast with where we were at that point.
By using this system of creating a forecast and comparing that to actual financials on a monthly basis I was able to focus on income areas that were falling behind and stop expenses that I didn’t need to make.
Budgets are the backbone of every business. It doesn’t matter if you’re a brand-new startup or a well-established brand with a few years under your belt, you need to have a budget.
Here are five steps to help you create a budget for your small business:
Step 1: Determine the purpose of the budget.
What do you want your budget to accomplish? Do you want to grow in sales? Do you want to reduce costs? Or do you simply want to know where you are financially?
Step 2: Determine what time period you need to cover with this budget.
A one-year budget works well for most businesses, but if your business fluctuates heavily in sales, consider basing it on seasonal sales.
Step 3: Do a thorough cash flow analysis.
This means looking at how much money is coming in from sales and other sources and how much is going out for expenses and taxes. Take a look at last year’s numbers plus anything that will be different this year (new projects, increased staff, etc.). Incorporate fixed expenses such as payroll and taxes, as well as variable expenses such as inventory costs, transportation and marketing costs.
Step 4: List your expenses.
List all of your expenses in order of priority. These include rent or mortgage payments, groceries, utilities, transportation costs, insurance premiums and any other. You also need to determine how much money you need on hand for emergencies and unexpected costs. This amount will vary depending on the size of your business and the industry in which it operates.
Step 5: Make assumptions about the coming year.
Once you have an idea of where you are now, think about what the next year will look like for your small business. Will sales increase or decrease? What costs can be cut? Will there be any new products or services? These questions can help give you a better idea of what to expect in the coming months. Then use industry benchmarks or data from previous years to make assumptions about how this information might translate into numbers throughout the year.
Final Thoughts
In order to stay on top of your small business finances, you need to be able to forecast what’s coming in and what’s going out. With a well thought-out budget, you can anticipate the financial needs of your business and plan accordingly.