UPDATE: This small business post was originally published on 9 July 2019 and updated on 14 January 2021.
Assuming you’re in business to make a profit, your ability to be profitable relies on creating a budget. A budget is simple to create and is a critical small business tool.
If you’re like me and eager to outsource anything that deals with numbers and accounting, you’ll be happy to know that by the time you’re done reading this, you’ll be able to set up a budget. We will explore the essential components of a small business budget and where to find templates to get you started.
I’ve made an effort to eliminate financial jargon, but inevitably you will come across financial terms as you run your business. You’ll find a user-friendly glossary of financial terms at business.gov.au.
5 steps to creating a budget for your small business
Small businesses vary in size. But a small family store, a regional manufacturer that employs 20 people and a sole trader who hires subcontractors all have something in common. They all need to earn enough money to cover expenses to stay in business.
What is a small business budget?
A budget is a financial plan that guides you and helps you make smart business decisions. It compares the dollar amount you think you will make and spend (income and expenses) with the actual amounts after a set period of time.
The goal of creating a budget is to give you control and insight so you can make decisions that give you enough money to run your business and pay your staff.
For example, if you know you have a predictable slow season, you’ll be able to adjust your spending months ahead of time to ensure you have funds to pay for fixed expenses throughout the year.
Step 1: Determine a time frame for your budget
You can choose to create a monthly, quarterly or yearly budget. If this is your first time, try a monthly budget until you feel comfortable with making projections.
Projections are predictions of what might happen in the future based on past activities.
Your business may have one or more busy and/or slow times of year. Quarterly budgets are a useful snapshot of those times, but an annual budget will combine the highs and lows to give you a clearer understanding of your overall financial health.
If at the end of the year you’ve brought in more money than you’ve laid out, it’s all good. Now, the goal is to plan for the highs and lows.
Step 2: Create a spreadsheet or use a template
Set up a spreadsheet in Microsoft Excel, Apple Numbers, Google Sheets or Xero. By using a spreadsheet, all you have to do is enter the categories and your corresponding dollar amounts.
If you have a bookkeeper or business accountant, they may have a more sophisticated program, but a simple spreadsheet is enough to get started.
Sections to include:
- Planned expenses
- Actual expenses
- Planned income
- Actual income
Try one of these free templates as a starting point to set up your own:
Not seeing what you want? You can find more free budget templates here.
Step 3: List all your business expenses
Expenses are an unavoidable part of running any business. By understanding where you’re spending money, you can make decisions that help you control spending and increase profit. Below are examples of expense categories you may include in your budget.
Fixed Expenses or Costs are expenses you must pay no matter how much money your business makes.
If you don’t sell anything this month, you’re still responsible for these bills. Variable Costs are expenses that can change, depending on the time of year or how busy you are.
Established businesses will have an easier time creating their initial budget than a startup. Since a startup doesn’t have a financial history, you will need to make an educated guess. When doing so, be conservative and expect your expenses to be higher than you think and your income to be lower.
Step 4: Determine your anticipated income
Start with historical data if you have it and use your market research from your business plan to make a prediction. If you know what you made last year, start with that figure and add or subtract from it, depending on how you think the year will go.
Step 5: Review and refine your budget
At the end of your chosen time frame (let’s say it’s quarterly), you’ll compare the actual amount you spent for each category with the budgeted amount you entered three months ago. By comparing the two, you’ll notice where you’ve spent more than you thought you would spend.
This information will help you see where you’re losing money or need to tighten spending. With this knowledge, you can adjust your budget, income strategy and spending for the next year. With each budget review and adjustment, you’re getting closer to a more profitable business.
It’s your turn. Protect your bottom line.
Put your new knowledge into action and create a spreadsheet. It won’t be as hard as you might think.
Going through this process will help you understand if your business income will cover your expenses, or if you need to focus on increasing your income, decreasing your expenses — or both.
When you have a firm handle on your business budget, you’ll be in a better position to grow your business and increase profitability.
Image by: Happy Campers Australia