One of the most challenging aspects of operating a small business is managing your finances. Small businesses often have limited cash flow and several expenses — making it difficult to plan your spending efficiently. Efficient budgeting practices are therefore a priority for any small business.
This doesn’t mean you need to save every dollar you can. Instead, budgeting refers to controlling your finances and planning future spending. That will help you maximize your profits and will allow you to be prepared for unexpected expenses in the future.
What is a Budget? What is Budgeting?
A budget is simply a financial plan for a certain amount of time. It helps you keep track of your revenue, expenses, debts, and all other aspects of your finances.
Budgeting is the process of creating your budget. This means reviewing your revenue and profits, recording your recurring expenses, planning future purchases, and more.
Good budgeting practices will ensure that you will always have money for the things that you need because you will have planned for them in advance.
Why Do You Need a Budget for Your Company?
Small businesses can’t afford to lose track of their finances.
There are several reasons that you need a budget for your company. Budgets help you:
- Plan future expenditures
- Determine whether or not you need additional financing
- Understand how you can alter your spending to maximize profits
- Make financial decisions quickly and easily
- Decide how to invest your business profits
- And more
Ultimately, without a budget, it’s impossible to effectively and efficiently plan your finances. Learning how to make a budget for your business will ensure that you are always prepared for the future.
What Types of Budgeting Can You Use?
There are two primary types of budgeting for businesses: operational budgeting and capital budgeting. It’s important to understand what these types of budgeting are and how they can be applied to your small business.
Operational budgeting is the process of creating a budget based on your business’ daily operations.
This includes things like:
- Expenses for each department
- Projected financial statements
- Sales revenue
- Manufacturing expenses
- Labor costs
- Marketing costs
- And more
By creating an annual operating budget based on estimates of your income and expenses, you can effectively plan your finances for the following year.
While an operational budget is meant to help you plan for your expected income and expenses, a capital budget is meant to help you prepare for major projects and investments.
A capital budget typically includes a list of each of your major projects and investments, the cost of these items, and the expected profitability of these investments.
This type of budget will help you prepare to finance major projects and invest in fixed assets.
Steps to Create a Budget for Your Small Business
Creating a budget for your small business is less intimidating than it might seem. It just takes a little bit of time and planning.
Follow these five steps to get started on your small business budget.
1. List Your Income Sources
First, you need to list all of your income sources. This will tell you how much your business makes on a monthly basis.
Income sources may include:
- Sales revenue
- Small business loans
- Business savings
- And more
Analyzing your past financial statements can help you quickly put this list together. Be sure to double-check your list to guarantee you’ve included every source of revenue.
2. Determine Fixed and Variable Expenses
Next, you need to compile all of your fixed and variable expenses.
Tracking your fixed expenses is one of the easiest parts of creating a budget. These are costs that remain the same on a monthly basis. Fixed expenses might include:
- Rent/mortgage payments for business properties
- Legal services
- Business internet
- Loan payments
- And more
You also need to prepare a list of all of your variable expenses. These are costs that may change on a monthly or yearly basis. Examples of variable expenses include:
- Employee turnover
- Marketing expenses
- Manufacturing costs
- Business-related travel
- Freelancer wages
- And more
Tracking your expenses will help you manage your profits more effectively.
3. List Your Planned Purchases
It’s also important to predict any major purchases you might make in the future. This could include anything from purchasing new equipment to buying real estate.
Effective budgeting allows you to make sure you have enough money set aside for major purchases.
4. Create an Equipment Budget
Additionally, it’s always a good idea to have a separate equipment budget — especially if you own a manufacturing business or another type of company which relies on expensive machinery.
Equipment budgeting is a little bit different than creating a standard budget. However, learning how to create an equipment budget will help make sure that your small business can always afford the equipment it needs to succeed.
5. Review Your Budget
Last but not least, you need to review your budget on a regular basis.
Budgets are financial projections based on estimates. While you should be able to prepare a fairly accurate budget, it’s impossible to predict your business’ exact revenue and expenses.
As your business grows and your finances change, you need to review your small business budget to make sure it is up to date.
Template for a Business Budget
Need help getting started on your small business budget? Fortunately, there are plenty of helpful budgeting templates to help you get going.
This free template from Capterra will help you create a monthly and annual budget. Then, you can compare your budget against your real numbers to update your budget as needed.
Capterra’s template detailed, step-by-step instructions to help you learn how to easily create your own small business budget.
Additionally, you can learn here how to make a small business budget with QuickBooks or Xero.
Tips to Make Your Business Budget More Efficient
To make budgeting easier and to ensure your budget is as efficient as possible, consider using some of these budgeting tips when you’re ready to get started:
- Use budgeting software to make this process easier
- Use our business loan calculator to help you determine if a business loan fits your budget
- Use spreadsheets to keep track of your revenue and expenses
- Research common budget plans for businesses in your industry
- Review and adjust your budget regularly
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