How to Create a Business Budget in 5 Steps
Creating a business budget for your organization is vital to its success, regardless of size. It’s a well-known reality that before you make money, you need to understand how to spend it.
A business budget involves more than spending, though. It includes tracking expenses, revenue and how much cash a business has on hand.
Regardless of the size and type of your business, creating a budget is possible in five simple steps. We are sharing tips below to show you how easy it is.
What is a Business Budget?
A business budget is an action plan that outlines financial and operational goals. Its main purpose is to help track and manage income and expenses for the future. A business budget is an essential element of the business plan. Without one, your business will struggle.
Why Your Business Needs a Budget
The bottom line is that budgets help businesses reach goals. If you need help setting business priorities, a budget is the best place to start. Budgets also help cut business risk, identify problems and recognize opportunities. It’s the ultimate tool to organize and plan. Without a budget, you are blindly operating your business.
A budget is helpful in many ways including the following:
- Total start-up costs (for a startup business)
- Operational costs
- Necessary monthly revenue
- A realistic estimate of profits
- Funds needed for expenses (i.e., marketing, supplies, etc)
How to Develop a Business Budget
The real question is how do you create something useful for your business? Follow the five steps below for an easy, done-in-one-day, business budget!
● Calculate Average Income
Let’s start with something easy. The first step in a business budget is calculating how much money you bring in. Once you determine all income sources, calculate your monthly income.
Since you are developing a budget for the upcoming year, this will likely be a projection of what you anticipated income. This will be easier if you can use the previous year’s income as a base for the next year. Remember to take fluctuations in sales volume into account. You will get the most accurate picture if you look at revenue for the previous 12 months. This way earning patterns are easy to spot.
If you are starting a new business, budgeting will need to be more fluid. Startup businesses can begin by estimating realistic revenue. Err on the side of caution, you would rather underestimate than overestimate. Remember, this can always be adjusted month-to-month to more accurately illustrate income.
Budget planning begins with revenue and income. This helps determine which expenses are feasible.
Examples of income sources include:
● Determine Fixed Costs
The second step in creating a business budget is calculating all fixed costs. The term fixed cost refers to any recurring expense that remains the same each month. Fixed costs can be daily, weekly, monthly or yearly expenses.
It’s a good idea to break them down separately for a clear picture. Each business has expenses unique to its operation. This is where bookkeeping and financial statements come in handy. Financial statements should include an itemized list of all fixed costs.
A few examples of common fixed costs include:
If you are a startup, you will need to estimate some of these costs. Brainstorm what upcoming costs may not have occurred yet. Once you’ve identified fixed costs, subtract those from your income and move to the next step.
● Tally Variable Expenses
The third step in creating a business budget is determining variable expenses. Variable expenses are also listed in itemized financial statements from the previous year. Variable expenses are those that respond directly and proportionately to changes in activity level or volume. These expenses are things that don’t have a set cost and vary from month-to-month.
Examples of variable expenses include:
Travel and utilities are variable expenses that can change often throughout the year. If you live in a climate where temperatures fluctuate, this is especially true. The cost of utilities can vary depending on the season. And depending on the type of travel—from road warriors to million-mile air travelers—travel costs vary from location to location.
Other variable expenses can often be adjusted based on business revenue. These expenses are commonly referred to as “discretionary expenses.” These are not necessary for your business to operate. Include these in your budget spreadsheet because you may choose to add them to your spending during more profitable months.
Once you’ve identified variable business expenses, subtract those from your income.
● Set Up An Emergency Fund
Plan for the unexpected with an emergency fund. This is set aside for one-time expenses that are not included within variable expenses. These emergency expenses are almost always inconvenient and come at the worst time. This includes equipment that needs replacement or something more catastrophic like a break-in.
If you plan in advance for these types of situations, then it is much less stressful when they do arise. In fact, with a rock-solid business budget, the unexpected expenses are merely a blip on the radar!
● Finalize the Numbers
You have analyzed income, fixed costs, variable expenses and set up an emergency fund. Now it’s time to pull all the numbers together to determine expected profit for the upcoming year. Growing profits are a good sign of a healthy, growing business. If this is the case, you now have a new task of figuring out where those profits would benefit your business the most. Many companies opt to reinvest in their business, pouring profits back into the organization in order to scale and grow.
The wonderful thing about a business budget is its ability to be adjusted if the numbers don’t come out quite as well as expected. This is especially true for small business owners starting out. If you find that expenses are higher than the estimated revenue, you can make adjustments. It’s okay if profit is minimal at the beginning if you’ve planned for that.
Another thing to remember is that you should adjust figures throughout the year. If your revenue increases or decreases (we hope not the latter), you will likely change how money is spent and allocated across business units.
Create an At-A-Glance Budget Spreadsheet
We get it. The daily grind of running a business can be a time-suck. When budgeting crosses your to-do list, you don’t have the time or energy. We recommend creating a simple spreadsheet that provides you with a budget summary. Excel is a great place to start. If you aren’t ready to create your own, Google Sheets and The Balance provide several free templates. This is a great way to summarize and review your finances every week.
Some business owners shy away from reviewing finances because of the stress it induces. We encourage you to make budget evaluation a regular habit. Avoiding budget discussions will only make things worse. The goal is to have a successful, healthy business. So stop being afraid of budgets, and start loving them.
The most successful companies continually monitor and adjust their budget as needed, fiscal responsibility is key not only when starting out, but as an organization expands its operations. Proper budgeting will allow for responsible and more successful growth.
Budgeting for Different Types of Business
Sometimes budgeting details need to be tailored for the type of business you run. We have listed several common businesses below with special considerations for each.
- Enterprise Business
An enterprise is another term for a large corporation. Enterprise businesses typically have several hundred employees or more.
When you’re dealing with a larger company, each department will have specific budgets as well. This type of budget is more involved and requires participation from many departments. Get department managers involved in the process. It’s important to have feedback from them as well as they are more involved in the day-to-day operations of the organization.
- Small Business
Depending on the industry, a small business can range from a maximum of 250 employees to 1500 employees. That’s a wide range. The Small Business Association has size standards to help determine if your business qualifies as small. When we talk about small business, however, we are typically referring to companies with just a handful of employees because small businesses with less than 20 employees make up about 89.6% of all U.S. businesses.
With this type of budget, it is helpful to build several scenarios, including the best and worst case. That way, if your business takes off you can implement the details expressed in the best case budget. And vice versa, if your business is slow, you have an action plan for making changes when profit is not ideal.
- Seasonal Business
Seasonal businesses that have a high season need to be especially particular with budgeting. While this added challenge can be a source of stress, it doesn’t have to be with proper financial planning.
Seasonal businesses that experience a high season need to pay close attention to budgets. While this added challenge can be a source of stress, it doesn’t have to be with proper financial planning. However, all of these activities still cost money, and employees still need to be paid. Careful planning and proper business budgeting will help keep projections on pace throughout the year. The steps for a seasonal business budget are similar to what is detailed above. It is important to pay close attention to how income is distributed over 12 months.
- E-Commerce Business
The biggest factor in an e-commerce business is the cost of shipping. Shipping costs can and will fluctuate over time, so it’s important to have a plan in place. Does the price of your product incorporate the cost of shipping or do you offer flat-rate shipping? This should be a consideration, especially depending on the size and shape of your product(s).
- Inventory Business
The best way to ensure success in an inventory business is to accurately estimate future demand. The easiest way to do this is by looking at previous sales. Look at the average over 12 months. This will take into account high sales months and slower months as well. Shipping and product costs will vary greatly, so it’s important to do due diligence before ordering inventory.
- Service Business
Service business income and profits require flexibility. Without a physical product, your estimations will be based on the amount of workflow and projected hours of consultative services. Focus your income estimation on sales projections and consultant costs.
- Startup Business
Budgeting is more difficult for a startup. You don’t have previous months to base income and expense estimations on. Instead, reach out to networking friends and fellow business owners that might be willing to help. Do your research! It will take more work on the front end, but it is worth it. It’s always best to estimate expenses on the high-end since there are some unknowns with a startup.
- Custom Order Business
When creating custom order products, factor in enough time and materials. It may be a good idea to include a reasonable buffer to ensure you turn a profit. We also encourage custom order businesses to require a deposit upfront. This ensures payment in case someone backs out.
We bet you’ve been thinking about creating a budget for a long time. Put aside some time and make the effort. Use the five steps we listed above to create a powerful business budget. You’ll feel better and more accomplished once it’s done. But that isn’t where it ends. Don’t create a budget and file it away to review again next quarter. Keep it handy and top-of-mind in order to adjust as you scale your flourishing business.