Creating the Best Budget For Your Business This Year
Keeping your business’ budget in line is arguably one of the hardest parts of starting and maintaining a business. There’s a lot of variables to account for, and if you’re not organized, this can quickly become a nightmare. So, in this article, we’re covering how to create a business budget.
A business’s budget isn’t just important for its financial well-being. It’s important for the future of your company, planning any expansion, finding investors, and a variety of other business aspects. In this step-by-step guide, we’ll address how to accurately plan your budget, along with an example small business.
If you’ve already taken the time to create your budget, but have consistently missed it and need to re-adjust, read our previous article about the biggest budgeting mistakes and how to correct them. If however, this is your first crack at officially creating a business budget, continue reading for our step-by-step guide.
How to Create a Business Budget: Step-by-Step
Let’s start by addressing – what is a business budget? It’s exactly what it sounds like – a monthly and yearly budget for your business. It should account for all of your revenue, fixed expenses, variable expenses, and any other costs your business could incur – even unexpectedly. Your budget should try to anticipate your financial future, so you know exactly what your business can handle, and how it can grow.
To do this, you will need some of your past financial data to go off of first. So, the first step before you actually start creating your business budget is to collect at least a year’s worth of your income statements. If you don’t have this much previous data available, just collect as much as you can.
You then use this information to create a business budget accurately, using your past data and any trends you find in the process. For example, if your November and December revenue is consistently higher than the other months of the year, that would be a trend. Meaning, you’re getting a good amount of holiday activity, so take note of it and remember to calculate this into your findings. Now that we’ve covered how you can prepare to create a business budget, let’s jump into the first step.
Add Up Income and Revenue
Our first step for how to create a business budget is adding up all of your income and revenue. An important note to remember – you’re calculating all revenue – not just your profit. Profit is what’s leftover after deducting any and all operating expenses, recurring expenses, etc. So, if you start with your profit, you’ll be shocked at the end of these steps when your “profit” is tiny!
Start by looking through your sales and the income coming into your business’s bank account. Identify all consistent revenue sources. This can depend on the type and structure of your business. For example, if you have individual “clients” rather than overall sales, you’ll need to ensure all clients’ payments are included in your calculations. Likewise, if you own a small boutique, you can simply pull your total sales.
As we previously mentioned, you’ll need your financial history to compare against. Ideally, you would use a month-month breakdown. This is the best way to identify when your business is busier or slower if there are any variables that affect your revenue stream (like seasonal changes), or any other trends you can pinpoint.
After you’ve thoroughly collected all of your revenue sources, total it up and put this information aside for our last step. The next step for creating a business budget is finding all of your fixed expenses.
After you’ve calculated your total revenue, you need to see what costs are continually coming out of your business’ account. These recurring expenses are called fixed expenses. These kinds of expenses can come from vendors, payroll, materials, insurance, renting an office space, etc. Basically, costs that you know will come out at the same time every month and will remain the same.
One of the easiest ways to do this is by simply running through your bank statements and notating fixed expenses. Once you’ve identified any and all fixed expenses for your company, add them up, and set this number aside as well. You may be wondering what you do with recurring costs that aren’t fixed – which brings us to our next step.
Determine Variable Expenses
Unlike fixed costs, variable expenses can fluctuate and change depending on how often and how much you use the service. However, it’s still something you have to calculate when creating a business budget. A great example of a variable cost is utility bills. The expense is a consistent one, but the exact cost fluctuates depending on how much electricity or water your company uses.
If a variable cost varies dramatically, this is where your past financial data comes in handy. Determine how these things fluctuate between months, or find an average if it’s a small fluctuation. Depending on where you live, something like utilities can vary drastically enough between months that an average isn’t practical.
In Arizona and Colorado, for example, the weather between summer and winter varies enough that you should plan your utility expenses accordingly between seasons rather than using an overall average. Once you’ve found and properly accounted for your variable expenses, add them up and keep this amount handy for the last step.
If you’re unsure whether or not one of your costs is a fixed or variable expense, learn more about the differences between the two in this article from The Balance. Now that we’ve covered fixed and variable expenses, let’s discuss the worst kind of expenses – the unexpected emergency ones.
Estimate Emergency or Upfront Expenses
While it’s impossible to predict when an emergency will happen, you can still be prepared for it. Whether it’s a natural disaster that breaks some office windows or a piece of expensive equipment that goes out unexpectedly, it’s always stressful. What makes it even more stressful is when you weren’t financially prepared for such an event and have zero room in the budget to accommodate it.
Create an account for these instances and plan for them within your budget. While it’s very unlikely that you’ll need this wiggle room the majority of the time, you’ll be beyond grateful for it the times you do need it! If not, you’ll at least have that extra money left over in your budget to add some of it to your emergency fund.
Now that we’ve covered what’s involved within a business budget, let’s see what you do with all of that information.
Combine & Calculate
Now comes the fun part of creating a business budget – math! Okay so maybe not the fun part, but you’re at least at the final step and will soon have a full budget for your business. After you’ve determined your fixed, variable, and emergency expenses, combine them into one expense.
Then, take the amount calculated for your total monthly revenue, and deduct your total monthly expenses. This gives the company’s total net income. Remember to correspond the previous month’s or season’s data to your projections. Meaning, if you have winter and summer trends, calculate winter and summer budgets.
- Total Monthly Revenue – Total Monthly Expenses = Monthly Net Income
Examples of How to Create a Business Budget
Now that we have all of our steps for how to create a business, let’s apply them to an example. Our example company is a small business that we’ll call ABC’s & 123’s Childcare. Keep in mind, this is an over-simplified version to make it easier to follow. Now, let’s break down ABC’s finances step-by-step by their income, fixed expenses, variable expenses, and emergency expenses.
Income and revenue:
- 1 (ages 2 years & under): $11,000
- 2 (ages 3 years – 6 years): $10,000
- 3 (ages 7 years – 9 years): $2,500
- 4 (ages 10 years and up): $3,000
- A la carte snacks: $500
- After-hours care: $6,000
- Total Income and revenue: $33,000
- Building rent: $5,000
- Payroll: $4,000
- Insurance: $3,000
- Internet: $100
- Playground landscaper: $200
- Total fixed expenses: $12,300
- Diapers and hygiene products: $1,500
- Utilities: $350
- Meals & snacks: $2,000
- Total variable expenses: $3,850
- Playground repair: $2,000
- Replacement high chairs: $500
- Replacement crib: $800
- Total emergency expenses: $3,300
So, the total expenses, including any emergency expenses would be $19,450/month. Then, we would take this amount and subtract it from ABC’s overall revenue, which was $33,000. This gives ABC’s & 123’s Daycare a total Net income of $13,550 each month. Remember, ABC might not always use the emergency expenses we’ve accounted for. So, they’re able to put away a good chunk of money into their emergency account each month that they don’t need a new high chair or crib.
Go Forth and Budget for Your Business!
Now that you know exactly how to create a business budget, get to work! The sooner you have a budget created for your business, the sooner you’ll be able to relax and focus on the other important parts of your company – like using your new business budget to invest in your company’s future. So dust off those financial records, grab a cup of coffee and calculator, and start budgeting!