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Small Business Budget: How to Create It?

Tips / 24.09.2021

If you’re a small business owner and numbers are not your strong point, we’ve got good news.

You can stay in control of your business finances and achieve business success with a small business budget.

Although its numbers might seem overwhelming, a budget is essential to running a business as it has a direct impact on your actual revenue.

In the following sections, we share everything you need to know about small business budgeting – from planning it to why a detailed business budget is a must and more.

Table of Contents

What’s a Business Budget?

So, what is a business budget? In simple terms, it’s an evaluation of your income and expenses in order to create a financial plan that describes your expected income, business costs, and cash flow forecast for a specific period.

This data is carefully recorded and analysed to enable the creation of a forecast that will help small businesses make sound financial decisions now and in the future.

Keep in mind that you can have different types of business budgets, like a labour budget, operating budget, and more.

This small but vital step will help you keep track of your actual expenses and manage operating expenses, see where you can cut costs and overall, help you manage your most important business resource better – your money.

Why Is a Budget Important for a Small Business?

Now you might be wondering why a business budget is so important for small business owners. It is quite simple.

Firstly, a business budget helps you estimate your earnings going forward. Essentially, this is a projection of your anticipated income or an estimated income.

Secondly, a budget can help you plan for your expenses and turn spending money into a data-driven process. You’ll have a good reason for each cent you spend and nothing will go unallocated properly. Although this may not seem like a big deal at first, it can help you improve your financial health dramatically.

Finally, whether you are running a large enterprise or starting a small online business, budgeting helps you to stay accountable. This is one way of ensuring you’re meeting your goals and expectations.

Small budgets are often also encountered in startups and new businesses. Budgeting in new business ventures is, indeed, a key element of a sound business plan and a practical tool for getting the most out of your savings.

Steps to Planning a Small Budget

Now that you know why a budget is important for you, it’s time to determine how you’ll go about creating it.

Here are the main steps in the process.

Analyse Costs

The very first step of creating your small business budget is establishing the operating costs that you accumulate for running your business. Don’t forget that your business costs must be kept separate from your personal finances.

Overall, your costs can include one-off costs, employee costs, shipping costs, recurring costs, production costs, and even credit card fees. The majority of these expenses can be categorised as fixed costs or variable costs.

Identify Your Fixed and Variable Costs

Once you’ve made a list of all of your costs and you’ve analysed them, it’s highly recommended to split them up into fixed and variable costs. This will help you create a detailed budget that will ensure you spend money wisely and most importantly – it will guarantee you have enough money when you need it most.

But what’s the difference between a fixed cost and a variable cost?

In short, fixed costs are the expenses that remain constant no matter the level of products or services you produce as a business. Examples include rent, utilities, a telephone line, employee salaries, software, website hosting, and other similar costs.

On the other hand, variable costs are expenses that are based on the business’s activity level and can even be seasonal. These include costs for raw materials, shipping costs, sales commissions, marketing spend, and more.

Negotiate Costs With Suppliers

If you’re a small business that has operated for a while and has established connections with suppliers, it’s important to negotiate costs. This is especially crucial for those who are highly reliant on suppliers in order to ensure uninterrupted processes.

Prior to setting any financial goals or creating your budget, have a conversation with your suppliers and opt for discounted rates. This will help you optimise your monthly expenses and plan for other business investments.

Identify All Sources of Income

Next, take a look at your sources of income and make a list of all of the activities that are bringing in money for your business.

Do this for several months and if your business has been in operation for at least a year, cover the last 12 months. This is a great way to understand if your business is affected by seasonal trends – an important factor that we’ll look at later on in this article.

Estimate Your Revenue

When looking at past financial data, a lot of businesses uncover that they’ve been inefficient in estimating revenue. This usually happens when there are over-optimistic outlines of projected revenue.

Don’t worry, this is exactly why a business budget is a must. Take a look at any previous revenue you’ve generated. Make sure you track this information adequately and accurately based on a specific budget period. Use the data from your past revenue as a stepping stone for your projections.

Be as realistic as possible and avoid the temptation of overestimating your business.

Know Your Gross Profit Margin

In a nutshell, a business’s gross profit margin is the funds you have after subtracting all of your business costs at the end of the year. In essence, this metric demonstrates how financially healthy your company is.

Taking your profit margin into account is vital as it can give insights into whether or not your expenses dominate your earnings. It can also help you discover costs that are not helping your business in any way, requiring action.

Create an Emergency Fund

When creating a business budget, it’s recommended to always be prepared for emergency situations.

The business space is extremely vulnerable to external factors and you may encounter situations, which require operations outside of your budget. To overcome such challenges with ease, set aside extra funds for emergencies.

Factor in Seasonal and Industry Trends

Let’s not forget that running a business is a dynamic and ever-changing process. It’s unrealistic to expect that you’ll be able to generate the same results every month as there are multiple factors that will influence your performance.

Seasonal changes and industry trends are among the most popular elements that can have a significant impact. During some months of the year, you may need to reduce your cash budget to avoid disruptions or increase spending to generate more revenue. Plan accordingly and optimize your budget for seasonality.

Set Spending Goals

At the same time, creating a reliable business budget is a lot more than simply adding your business costs and subtracting them from your earnings.

Set spending goals that will enable you to ensure your financial resources are being allocated in the best possible way for achieving your business goals .

For instance, imagine that you’re making substantial investments into machinery that will produce only a limited quantity of products that you sell at low prices. This investment could be substituted with a more expensive tool that will help you reach your financial goals.

The key here is for you to have already established your business goals and to have calculated appropriately how much you can afford to spend.

Benefits of Budget Planning

So far, we’ve just covered the importance of planning a small budget and how to create it, but there are more purposes it serves and benefits it offers.

Below, we offer a summary of some of the most important uses of a business budget:

Create a financial road map: this road map will help you make sound financial decisions as it helps you determine where you are now and whether you’re on the right track to achieving your financial and non-financial goals in the future.
Increase profitability: by determining where you can cut down on costs related to running your business and increase your revenue streams, you’re one step closer to improving your levels of profitability.
Helps you get better funding: a clear budget that’s detailed enough and contains accurate forecasts and analysis will be a strong stepping point for times when you seek to apply for loans or funding.
You’ll be able to see the bigger picture: when you put everything down on paper or even a spreadsheet, you’ll see where your expenses are channelled and where your income is coming from. This will enable you to get a comprehensive look into your business’s finances and see opportunities for streamlining your business operations.
Set goals: having a budget can also help you set realistic goals as you’ll know where you stand now and where you expect to be in the future.
Improves your accountability: sticking to a budget will help you stay more accountable as you’ll be much more cautious with setting proper spending limits and being more responsible with your earnings.
Save money: in the long run, sticking to your budget can even help you save money and eliminate unexpected costs as you’ll be able to identify where your variable expenses are going and potentially minimise them.
Pinpoint poor habits: there are some expenses that are just not needed but you make them anyway. This can lead to poor financial habits that you can avoid.
Avoid overspending: another plus to budgeting is that it can help you control your finances and your business better. This is because you’ll know your limits and boundaries and will (hopefully) stick to them without overspending and running into debt.
Prepare for your financial future: a sound budget plan can help you predict both opportunities for future revenue growth and prepare for potential challenges. In that way, you can reduce financial uncertainty and develop foresight to reinvest where possible.

Considering all of these uses, it’s no wonder that creating a small business budget is a fundamental step to achieving your financial goals and making better decisions.

Small Business Budgets for Different Types of Companies

You’re now ready to create your own business budget. You can start by finding premade budget templates that are relevant to your business or start from scratch by factoring in all of the outlined above steps.

The last part of creating a budget that will help you stay safe and make more money is taking into account the type of business you’re in.

Seasonal Businesses

The most important thing to know about seasonal businesses when creating a business budget is that they often experience peaks and valleys in revenue throughout different months of the year.

Holiday shops, the tourism and hospitality sector, landscaping companies, and similar companies must consider the changes in demand throughout the year in order to adapt their budgets and invest accordingly.

Having an emergency fund for these businesses is highly recommended.

Ecommerce Businesses

On the other hand, eCommerce businesses often deal with demand fluctuations but also frequent changes in shipping costs, platform fees, and marketing.

If you’re part of this niche, make sure to create budgets for things like listing fees, payment processing charges, subscription revenues from recurring payments, and others. Make sure you budget accordingly for marketing, ensuring you have enough available funds for high-peak months or events (Black Friday, Christmas, and others).

Inventory Businesses

If you manage a business with physical inventory (like retailers and wholesalers), chances are that you’ll be facing specific obstacles related to stock management and cash flow.

To handle these efficiently, make sure you monitor how fast you sell your inventory and explore every avenue to prevent overstocking or tying up cash in unsold goods.

Factor in things like carrying costs, seasonal changes, supplier terms, and more.

Custom Order Businesses

For companies that provide made-to-order products (like designer furniture or customised clothing), it’s fundamental to consider variable production costs and timelines when budgeting.

Some of the best budgeting practices for custom order companies are to budget for materials based on fluctuating client orders, address extended timelines, rely on client deposits to cover upfront costs, and more.

Service-Based Businesses

Finally, if you own a service-based business, like a beauty salon or a freelancing company, expertise and time will be a priority when budgeting.

Factor in contractor wages and non-billable hours. Don’t forget to also plan for spending on customer relationship management tools.

Conclusion

Creating a budget for small business doesn’t have to be rocket science.

Sure, you might not find the process much fun, but you’ll certainly enjoy the rewards once you’ve created your budget, stuck to it and see the results of increased income and decreased expenses.

Increased income can be reinvested back into your business, saved up or even put into a separate emergency fund. Meanwhile, while not all expenses can be decreased, some can be eliminated altogether and you can see where you’ve been throwing away your good money.

This all stops though with the creation of your budget.