How to build a budget for your small business.
The thought of budgeting for your small business may seem like a complicated process.
In reality, you do not need to be a financial wizard to create a useful budget. Use our top tips and you will see that it is actually quite a simple process.
Developing a budget is key to the success of any business. With the help of budgets, business owners can track their various business expenses, see the movement of cash and track sales growth.
These guidelines help businesses allocate the funds they have. Here are some top tips to help you build a 12-month budget.
four types of budgeting
The first step is to decide which type of budget will work best for you and your business.
- Incremental Budgeting
This is the easiest and most common method used. Incremental budgeting is when you add or subtract a percentage from the previous month’s or year’s numbers.
- Activity-based budgeting
Activity-based budgeting determines the inputs needed to meet the output goals set. For example: ABC Company wants to meet its sales target of £200,000 in sales, and they need 3 employees. After calculating that they need 3 employees to reach the target, they would then budget the cost to hire those employees.
- Value proposition budgeting
Value proposition budgeting is a more reflective approach to creating a budget. Here, the budgeter will check every item on the budget to see if it brings value to the company. The goal of this method is to avoid any unnecessary expenses. It is essential for the item to have a larger value than cost.
- Zero-based budgeting
The final budgeting method is zero-based budgeting. All budgets are essentially rebuilt from scratch. This type of budgeting is used to “shake things up,” and it aims to only include expenses critical to the company’s profitability.
building your budget
Step 1: Revenue
Every budget starts off with the revenue estimation. It is wise to look back at your monthly revenues from previous years, which would help with cash flow management. If your business is seasonal, it is a great way to identify any seasonal patterns and prepare your business.
Step 2: Fixed Costs
Fixed costs are all your expenses that don’t change throughout the year, like rent, insurance, and salaries.
Scroll down for more steps.
Step 3: Variable Costs
Your variable costs are the costs that change as your business increases production or costs planned that change throughout the year.
Examples of this are material costs, advertising, credit card fees, sales commission, and travel.
When it comes to estimating these costs, it is important not to be conservative when estimating. At the end of the month, it is better to budget for the worst-case scenario and have more money than expected than vice versa.
Step 4: One Time and Unexpected Expenses
It may seem odd to predict and forecast “unexpected” and one-time costs, but inputting these costs into your budget can protect your business from financial burden. Think of it as a “rainy day fund.”
Unexpected expenses that could be budgeted include equipment repair costs or unexpected interest charges. One-time fees include planned business trips or equipment upgrades. Recording these expenses will ensure you have enough funds to cover the costs.
Step 5: Putting it in the spreadsheet
Now for the fun part! This is where you combine everything you have written and import it into an Excel budgeting template or your accounting software, if it is supported. It may be helpful to include a profit line to visualise the potential profit each month.
When it comes to budgeting, it is important to have high estimates to make sure you budget for the worst-case scenario. That way, your business would have enough cash to meet any unforeseen circumstances.
It may be helpful to create a column beside each month and input actual numbers. This would help visualise your success in meeting those budget goals and help you make subsequent budgets.
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