How To Build a Budget for Your Small Business
/This post comes from Bench, America’s largest bookkeeper for small businesses. If you’re looking to get professional bookkeeping support for loan applications or tax season they can help you get started—you’ll also get a special discount with my referral link!
How to build a budget for your small business
If a goal without a plan is just a wish, then a small business without a budget is just a side hustle.
Having a well-thought out budget is the key to reaching your short and long-term business goals. It gives you an opportunity to plan how you’ll spend your money in the future, and can help you spot issues with your finances straight away—and, ahem, not two days before your bills come due.
New to all this? Here’s a six-step plan for building a small business budget from Bench, your friendly expert bookkeeping advisors.
What is a small business budget?
Your small business budget is a monthly, quarterly, or annual projection of your business finances.
It should outline all operating costs needed to run your business and give a clear overview of expected revenue and expenses. It tells you:
How much money you plan to spend to run your business
How much money you expect to generate from sales
How much money you hope to have left over after each month
That last one is important. One of the biggest benefits of having a realistic budget for your small business is the insight it provides for planning future investments.
Summarizing your business financials also helps you recognize and eliminate wasteful or ineffective spending to streamline your business operations.
Basically, it’s a way to plan for the future, rather than taking things day-by-day.
Step 1: Estimate your revenue
Your estimated revenue is the amount you expect to make from the sale of goods or services you provide.
While it may be tempting to base your budget on what you dream of taking in, looking at your business’s past performance is a better strategy, trust us.
If your business is established: If you’ve been working on your business for a while, use your sales figures from the previous year’s books as well as any new sources of business income you plan on generating in the budget period to estimate future revenue.
If you’re new to the market: If you’re in start-up mode and don’t have historical books, looking for industry averages can give you an idea of what your business could take in month to month. (You can always revisit and adjust later once you know what your business actually makes.)
At Bench, no matter where your initial forecasts come from, we recommend keeping clean, well-organized books as you go along. This is especially true if your business is seasonal or has an unpredictable sales cycle.
Step 2: Outline your fixed costs
Fixed costs are small business expenses that don’t change over time.
Think about the things you pay for no matter how much you make each month like rent, computer equipment, payroll, insurance, administration fees, or bookkeeping services (as long as you use a service with a flat monthly fee—like Bench).
Knowing the total amount of fixed costs per month will help you understand your non-negotiable monthly commitments and let you know how much extra money you have available for discretionary spending or new investments.
This information might also help you calculate:
What your business needs to earn to be profitable
The amount of cash you’ll need on hand
How much cash reserve you’ll need for leaner months
Step 3: Determine your variable costs
Variable costs include the prices of raw materials, labor, and distribution related to the products or services you sell.
These costs grow alongside your production volume. Think packaging, hourly wages, commission, or credit card transaction fees. So if it costs $12 to produce your patented air pods holder, when you double your production, you may also double your variable costs.
Knowing your variable costs allows you to:
Determine how much to charge for your product or service
Calculate the break-even point of your product or service
Find ways to cut down on costs and increase your profit margin
(See, your trusty budget helped you do all that!)
Step 4: Establish your cash flow
Unlike revenue, your cash flow is the amount of money coming in and going out of your business.
Have cash on hand: Paying your fixed and variable expenses without going into debt is the foundation of growing your business. Without it, you won’t be able to afford to pay for necessities and your business will suffer. If you do have debt, you may wish to ask yourself, is consolidating a debt a good idea? Alternatively, paying off your debts with a personal loan can be an effective strategy to manage your finances as you stabilize your cash flow.
See the bigger picture: Comparing the total amount of incoming cash with outgoing expenses is an easy way to understand your overall profitability. From there, you can decide whether you need to trim, tweak, or expand your small business budget.
In order to get the information you need to accurately calculate your spending, we suggest (surprise, surprise) keeping good records that let you track your earning and spending over time. Many small businesses are afraid to allocate a budget for important tools or software that can streamline their business instead they overspend on 2 or 3 employees that can only be done by software. Visit Apromore to learn more on how to streamline your business.
Step 5: Figure out one-off expenses
You’ve sorted out fixed costs, variable costs, and cash flow. But there’s one more budgetary item to make your small business operation almost foolproof: the back-up fund.
When your laptop dies suddenly or you need to hire someone to fix the staff kombucha bar, squirreling away a bit of cash for unexpected expenses can go a long way toward protecting your business.
Step 6: Keep your finances on track
Most successful business owners know that a budget is only as good as the data it’s based on. Keeping accurate and up-to-date records takes work, but the insight you gain into your business is priceless.
As your business grows it might make sense to hand time-consuming tasks like bookkeeping over to the pros. From bookkeeping to banking, Bench makes budgeting a breeze.
Expert bookkeeping: Your Bench team will organize all business transactions, prepare financial statements, and keep your books up to date and squeaky clean.
Financial reporting: Your Bench income statement, balance sheet, and visual reports provide crystal-clear data on the health of your business, and let you see opportunities for growth.
Year-round tax support: Come tax time, your dedicated Bench team can take care of everything to make your tax filing simple and stress-free.
Put simply, it’s the all-in-one financial toolkit your business can count on.
