Many entrepreneurs struggle with cash flow management and poor cash flow understanding. Cash flow issues can result in small businesses shutting down within the founding years.
Money, Money, Money: How to Set a Small Business Budget in 6 Simple Steps
You can prevent cash flow issues if you create and use an effective small business budget. This is a tool that helps you estimate upcoming incomes and expenditures. It gives you foresight for operating within your means, avoiding risks, and making profits.
Are you trying to set a small business budget but aren’t sure where to step? Click here for 6 tips on how you can accurately manage your money.
1. Estimate and Tally Revenue Sources
The first step in creating a small business budget is projecting revenue sources. Expected revenues determine whether your business can cover operational costs and make profits.
One of the crucial small business financial tips when creating a budget is to be realistic. Don’t overestimate or underestimate them or else you lose a sense of direction. Use previous year’s revenue records as a reference point.
Every year you have growth goals and sales targets. Estimated revenues need to take into account potential growth from expected new business. If you’re aiming to add 50 clients, figure out how they may bring in and add to last year’s numbers.
Also, look at all income streams if you want to arrive at realistic revenue figures. Income streams vary based on business models. Some businesses may make money from physical products, consulting, training, or selling courses.
Remember to factor in seasonal changes and trends when making your estimates. Business performance is likely to fluctuate and so can your revenues. With the right insights, you can plan for risk management in bad months.
2. Add Up Fixed Costs or Expenses
Fixed expenses are those expenses you must incur every month. They are the easiest budgeting aspect to predict because they stay the same each month.
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Fixed costs are necessary for smooth business operations. So separate them from other expenses. In most cases, you can touch these costs when adjusting your budget or when profits dry.
Fixed costs may vary based on business location or nature of small business. Some businesses are subject to profits tax. Examples of these costs include things like:
- debt payment
Find out all fixed cost obligations associated with your business.
3. Negotiate and Tally Variable Expenses
Variable costs change depending on business performance and demand for a service. Many are necessary for efficient operations. But you always have the leeway to control them as you see fit.
Some financial tips for businesses recommend a cost control department to boost profits. Cost control most of the time affects variable expenses. Management or business owners usually scan various costs and identify adjustable ones.
Here, you can negotiate with suppliers or pick friendly supply bids to lower costs. You can cut employee expenses or discretionary expenses to relieve some money.
Spend more on variable costs when you want to scale your business or meet increased demand. Cut down these costs during lean times or boost profits.
4. Factor in One-Off Business Expenses
You’re likely to spend on fixed and variable costs every month regardless of the season. You can only control or reduce but it’s almost impossible to do away with these costs. The only costs that are not regular on a small business budget are one-off business costs.
One of the costs might occur once or twice a year and are usually necessary for business progress. So don’t forget them. Have a list or table to fill in these costs when creating your budget.
Examples of one-off expenses include asset acquisition, office equipment, or training. Planning for them ensures that you prevent potential operational disruptions.
It’s also essential to plan for uncertain events which may affect your business. Equipment may fail or break down or a security breach might occur. Set aside money to ensure you’re able to cope when unexpected expenses arise.
5. Add Pay Yourself Items
Paying yourself must be one of the most confusing small business financial tips. Many entrepreneurs don’t pay themselves in the founding years of their business. Others overpay themselves so much that they’re left with little to scale their business.
Melanie Hopkins, the CEO of Finance Friend, advises that business owners must pay themselves regardless of the challenges they face. You probably put in many hours growing your business. So you must pay yourself even a modest amount.
The next crucial step in creating a small business budget is to figure out how you’ll pay yourself. Have personal financial goals and see what percentage of profits goes into them. Plan for an emergency fund, debt payoff, medical insurance, and retirement contributions.
Decide on monthly amounts that will support your personal goals and set them as fixed expenses. That way, you will always have part of your profits securing your financial future. Putting them as a fixed expense ensures you don’t risk personal finances when things get tough.
6. Bring Everything Together and Adjust for Profits
The goal of a small business budget is to ensure a sustainable business. Projected revenues need to be higher than expected expenses.
Tally all expenses─ fixed, variable, one-off, and personal pay items. Subtract the figure found from the total income. If income is higher than expenditure, implement your budget. If not, go through the variable, optional, and one-off expenses to adjust for profits.
Create projected and actual profit and loss statements to understand your financial position. If you’re making profits but you note some awkward variations, find out the cause.
Seasonal trends can affect income while new competitors can erode profits. Some investments could cause huge losses or massive gains. With a small business budget, you’re in a position to make the best financial decisions by exploiting opportunity or avoiding risk.
How to Implement a Small Business Budget for Success
At the top of all small business financial tips is taking action. Implementing your small business budget is the only way to ensure your financial status improves. Use your budget as a guiding tool whenever spending or setting business goals.
For more tips and advice on business finance, check out the rest of our blog.
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