I once met a person whose passion was budgeting. He’d enjoy doing budgets for himself, his business, his family, and his friends (honestly, I think he would have done one for his cat if he could). But, honor to whom honor is due, he was great at budgeting.
He was absolutely brilliant at it.
Before I met him, I was not really fond of budgeting. But the truth is that I didn’t know how to do it properly. Thankfully, he taught me some fantastic tips and tricks that made the whole process easier.
Every dollar counts, so it’s essential to know where your money is going, how you can use your money more effectively, on how to cut back on unnecessary spending. That’s the reason why it’s so incredibly important to learn how to set up a budget: you need it if you want your small business to succeed.
But where should you start? How can you create an adequate small business budget?
Let’s take a look at why you need a budget, how you can set one up, and a few other resources you can use to grow your small business.
Why Should I Set Up a Budget?
Creating a budget, while easier than most people think, does take some time and effort to do, so why bother doing it in the first place?
When managing a small business, every dollar matters.
From hiring employees and paying for benefits to purchasing equipment and renting office space, your money is likely already spread pretty thin between many necessary business expenses, so you can’t afford to waste any on unnecessary expenditures.
Moreover, budgeting gives your business more financial security. For example, if you run a seasonal business, a budget can help you plan to cut expenditures when you expect business to start slowing down.
Even if your business is doing very well and generating great profits, a budget can help you plan how to invest your money in the future and maximize your business profits.
Learning how to set up a budget can also help your business determine whether or not you need financing, if you can afford to borrow capital, and exactly how much funding you need.
It’s impossible to predict the future, but having a budget in place can help ensure that your business is financially prepared for whatever the future might hold.
Benefits of Budgeting
Budgeting can help your business succeed in several ways. Learning how to set up a budget can help you:
- Run your business more efficiently
- Cut unnecessary expenses
- Get financing
- Maximize business profits
- Plan future spending
- Predict future revenue
Most importantly, having a budget will help you look past the next few weeks and plan your business’ finances well into the future. This can help ensure the long-term success of your business by planning how to spend your money effectively to maximize profits and avoid unnecessary debt.
Don’t make the mistake of running a business without a budget. It’s crucial to take the time to learn how to make a budget so that you can protect your business’ financial wellbeing.
How to Set Up a Budget
The good news is that learning how to set up a budget for your small business is much easier than you probably think. By breaking the process down into a few easy-to-follow steps, you can create and maintain a successful small business budget.
So, are you ready to get started on a budget for your business?
It doesn’t have to be a complicated process. You might have to do a little bit of work to gather all of the necessary information, but by following these steps, you can set up your own budget without too much trouble.
1. Take a Look at Your Revenue
The first step in learning how to set up a budget is taking a look at your monthly revenue and where that revenue comes from. This can be used to predict your future revenue so that you can create a more accurate budget.
Sources of revenue might include:
- Business Savings
- And More
Remember, you should be looking at revenue, not profit. Profit is the money you have left after expenses have been deducted.
Once you identify all of your revenue streams, you can add them up to determine your monthly income. Ideally, you’ll be able to do this for each month in a year. This can give you a more accurate picture of your business’ finances and can show you how your revenue changes from season to season.
However, newer small businesses might not have this much data available. In this case, calculate your income from as many months as possible.
If you’re a brand new business and don’t have any financial history, you might have to look up revenue predictions for businesses similar to yours.
2. Determine Fixed Costs
Once you’ve determined your monthly revenue, it’s time to start subtracting expenses. First, you should start with fixed costs as these will remain the same from month to month.
These costs might include things like:
- Loan Payments
- Insurance Payments
- And More
Every small business will have different fixed costs, but these are a few of the most common ones.
After you identify and add up all of your fixed costs, subtract them from your revenue and move on to your variable expenses.
3. Determine Variable Costs
Variable costs are any expenses that change regularly, usually depending on how often you use the service.
This can include things like:
- Utility Bills
- Office Supplies
- Manufacturing Expenses
- Marketing Costs
- Employee Turnover
- And More
You can also add your discretionary expenses in this category.
Discretionary expenses are what you might call “nice-to-haves” — meaning, things you don’t need but make doing business easier or more pleasant, like company picnics. These are typically the expenses that you’ll look to cut first during slower months.
4. Consider One-Time Purchases
One of the best benefits of creating a budget is that it means you can plan your future spending.
Maybe you’re planning to open a new storefront by the end of the year. Or perhaps an important piece of equipment is starting to break down, and you need to buy another one soon.
If you have any future purchases planned, make sure to include them in your budget to protect your business from a significant financial burden.
5. Plan for the Unexpected
Just like you might have a personal emergency fund, you should consider setting aside some money for any unexpected business expenses.
Unexpected costs can have significant impacts on your business’ finances. So, instead of spending all of your surplus income on new business ventures, consider setting some of it aside. This can be used to buy new equipment when yours breaks down, fix the company car, or to cover any other emergency.
6. Create a Profit & Loss Statement
Next, you should create your profit and loss statement (P&L). Don’t worry, though; it’s not as intimidating as it sounds. It might take some time, but it just takes a little bit of addition and subtraction.
All you need to do is add up your total revenue, add your total expenses, then subtract your total expense from your total revenue. If you made a profit, you’d get a positive number. Otherwise, your business lost money for the month.
7. Review Your Budget Regularly
This is the last step in learning how to set up a budget.
Be sure to review your business budget regularly. As you continue to run your business, you’ll get more and more data that you can use to create a more accurate budget.
Budgets can and should change as your business’ finances and needs change. If your business grows, for example, and starts generating higher profits, your budget should reflect this change. Similarly, if business starts to slow down, you might need to cut expenses accordingly.
There’s no rule as to how often you should review your budget. You might review it monthly, quarterly, or annually. In any case, it should be reviewed regularly, and any time your business makes a significant change.
If you’re still having trouble setting up your small business budget, there a plenty of free templates available to help you get started.
This free template from Capterra, for example, will help you learn how to set up a basic budget fairly easily.
Alternatively, a simple search for “small business budget templates” will bring up a wide range of great results—one of which should fit your needs.
It’s Time to Start Budgeting!
Learning how to set up a budget is much easier than most people think. By following the steps listed above, you can easily create your own budget to help your small business succeed.
One of the great things about creating a budget is that it can help you determine whether or not your business needs financing (and how much).
Our motto at Camino Financial is “No Business Left Behind.” That’s why we offer small business loans with competitive rates, excellent terms, and low fees to small businesses in need of funding.
Our small business loans can help you grow your small business.