First-time business owners have to figure out several aspects of launching and running a business, and chief among them is creating a budget. The budgeting process can be intimidating for startups, especially if you aren’t familiar with business terminology and how to gather accurate financial information.
While creating a business budget may seem daunting, it is a necessary step to make prudent financial decisions and identify funding sources. A solid budget will serve as a roadmap to help you identify and achieve your business objectives while wisely managing your cash flow. If you’re currently building your company’s financial framework, follow these steps to create an effective business budget.
1. Evaluate Your Business Revenue
The first and most important step in the budgeting process is examining your revenue. This requires evaluating your existing sources of income, such as sales. By identifying these sources, you will know the total amount of money circulating in your business monthly.
It is important to ensure you are tracking your business’ revenue and not the profits. Revenue is the entire amount of money coming into your business before expenses and other deductions are made. On the other hand, profit is the amount remaining after expenses have been deducted.
Ideally, you should examine your revenue for an entire year. Doing this will enable you to identify seasonal patterns of income changes, making it easier to prepare for lean months.
2. Subtract the Fixed Costs
After identifying your business income, the second step in the budgeting process is deducting all the fixed costs. As the name suggests, fixed costs are predictable, recurring business expenditures essential to sustain your business operations. Typical fixed costs include:
- Pending debts
- Insurance premiums
- Supplies and materials
Note that every business has unique fixed costs. Once you have identified your business’ specific fixed costs, subtract them from your total revenue.
3. Determine Your Variable Expenses
Variable expenses are expenditures that change occasionally. Most of these are vital for your business to remain operational. Other variable expenses might not be necessary for your business but are nice to have, such as extra expenses intended to boost long-term profitability. Common variable expenses include:
- Marketing costs
- Office supplies
- Repair and replacement of old equipment
- Professional advancement
You should minimize such expenses during lean months and adjust variable costs according to your business income.
4. Set Aside One-off Expenditures and Unexpected Costs
Apart from fixed and variable business expenses, you should also consider some costs that happen less frequently. For instance, you might need to purchase a new laptop or pay for an upcoming entrepreneurship course. Budgeting for such expenses protects your business from sudden financial burdens.
5. Create a Profit and Loss Statement
Once you have identified all your income sources and expenses, the last step is creating a comprehensive view of your business’ financial standing, summed in a profit and loss statement. This process typically involves adding all your income, summing your expenses, and subtracting the total expenses from total revenue.
The budgeting process is important for business growth as it provides financial insights that guide decision-making. While creating a budget may seem time consuming, it is well worth it. With an accurate and clear budget, your business will be in a better position to plan for success.