Budgeting for Small Businesses
Running a business is like embarking on a journey, and while there’s excitement to be had in going off the beaten trail, the best way to get where you want to go is to have a clear path to follow. One of the best ways to chart your course is to develop a budget, as this will help you determine where you want your business to go and allow you to track your progress along the way.
When setting up a budget, it’s recommended you predict how much you expect to earn per month, quarter, and year. The more you break down your estimates, the more accurately you can compare your actual earnings alongside them, allowing you to make adjustments to your business strategy and catch problems before they grow out of control.
Keeping detailed records of years past will allow you to make more accurate predictions for years to come, such as noticing which seasons are busier than others and being able to adjust savings and expenditures accordingly. Of course, startups will not have previous experiences to fall back on, so they must base their budget predictions on a combination of thorough research of their industry’s standards and careful calculations of their own operating costs.
Having a clear view of how much money your venture must spend in order to operate will demonstrate how much money your company must earn to stay in business, which in turn helps you determine which strategies will best help you achieve those results. Likewise, by closely monitoring the strategy's performance and comparing it to the budget’s predictions, you can then judge how effective the strategy truly is, determining whether you’re earning enough profits to expand your business or if you’re suffering losses and need to make cuts to stay afloat.
If the coronavirus pandemic has shown us anything, it’s the importance of having an emergency fund. Part of your budget should be dedicated to setting aside extra money that you can fall back on during difficult times, and tracking how often you dip into those emergency funds versus how often you contribute to them will help you determine whether you can handle the peaks and valleys or whether you should apply for a business loan. Indeed, most financiers won’t grant you a loan if you can’t clearly show them how you intend to use the money, and if your budget still doesn’t impress them, that may be a sign that your business plan is not as solid as you thought.
This doesn’t necessarily mean your business is doomed to fail, perhaps your plans simply needed to be adjusted. Reviewing how much you plan to spend on materials and marketing and comparing that with how much you intend to earn back may reveal you should look into less expensive alternatives, or perhaps the shipping charges for international orders compared with the profit you make from selling worldwide may demonstrate that you’d be better off restricting your sales to local buyers.
Every business will have its own unique circumstances to navigate, and will therefore have to come up with its own solutions to overcome them, but the key figures to include in their budgets will all be the same.
Start by accounting for all sources of income, such as sales, commissions, services rendered, etc. Depending on how diversified your business is, this could be simple or complicated, but do not leave anything out. If certain streams of revenue are routinely underperforming or bringing in less money than others, you may want to consider if cutting them will save money that could be better invested in more profitable areas.
Once you’ve determined how much money you earn, or expect to earn, you’ll need to calculate how much money you’re going to spend.
These expenditures can be broken down into three categories: fixed costs, variable costs, and one-time costs. Fixed costs are consistent expenses such as rent, insurance, utilities, and things of that nature. Variable costs are expenses that are subject to change depending on a variety of factors, such as the price of materials or travel expenses for things like attending industry conventions. Lastly, there are one-time costs, which are expenses that rarely occur but still need to be accounted for, such as moving to a new location or replacing broken equipment.
By comparing all these figures together, you’ll have a clear perspective on how your business is doing, and what you need to do to help it do better. I know number crunching isn’t everyone’s passion, but there are a variety of tools available to help make things easier, or you may consider hiring a professional to handle the matter.
Whatever you decide to do, just make sure you budget for it.