Having a budget for your business is like having a map while traveling. Without one, you can never be sure if you’re going in the right direction.
Budgeting is one of those tasks that we know can immensely benefit us but are difficult to start with. But it’s worth it. Not only can a budget help with managing your finances, but also guide you through some tough decisions: should you think of branching out, do you need to look for extra finance from a loan, or is a product or service not profitable enough to continue.
It’s the roadmap of your company’s health, and you can start building it by following these three steps.
Step 1: Calculate your expenses
Expenses can generally be split into two categories: fixed or variable. Fixed expenses are costs that are charged the same price each month, such as rent and salaries. These most commonly include the basics that you need to keep your business operational.
Variable expenses are costs that don’t come with a fixed price tag but can fluctuate depending on how much you need in order to respond to customer demand—i.e. raw materials.
When building a monthly budget, financial statements from your bank can help you track and tally up costs that accumulate over the month. While adding the numbers, you can get a better overview of where your income is going, and whether there is any disproportionate overspending on any specific category.
Pro tip: While it’s not exactly an expense, one important element tends to be forgotten across these two categories—money set aside for a cash reserve. Having an emergency fund can make a world of a difference when your business is faced with an unexpected situation, so it’s highly recommended that you strive towards building one.
When you class savings as an expense, you separate that money from your profit figures. This approach makes it easier for you to not include it in purchases or investments unless absolutely necessary.
Step 2: Decide on income targets
Once you’ve added up your average expenses, you’ll be able to determine what kind of income you need to break even and make a profit. Depending on your business, earnings might be coming in from different sources. Here are some examples that can help you include as much as possible:
- Product sales
- Hourly earnings (for freelancers or businesses charging by the hour)
- Loan withdrawals
To make your budget more effective, it helps to have an understanding of how your sales might be performing in the near future. For example, are you approaching a seasonal rise in customer interest, or perhaps the opposite? This will impact how much income you can expect.
Predicting your sales can be tricky since you can never know with absolute certainty what might happen. But if your business has a bit of history you could turn to sales forecasting to have a rough idea of what to expect. This step doesn’t necessarily need to be complicated (or expensive), since there are free sales forecasting templates that use software like Excel to help you.
In the case that you’re just starting your business, research into the industry can give you a rough expectation of what might be reasonable. Try to keep your estimates conservative by underestimating your income and overestimating your expenses, at least for the first few months of your budget. After some time, you can go back and look at where you can make adjustments.
Step 3: Keep track of any differences
Draw one final row in your budget sheet where at the end of each month you can look at the difference between what you’ve predicted in your budget and what your actual numbers say. Regardless of whether the discrepancies are positive or negative, the important part is to keep a sharp eye on them and ask yourself why they happened.
By comparing your expectations to the final outcome, you could discover a potential problem at an early stage. Perhaps you’re overspending in a certain category, or a source of income isn’t delivering as much as before.
Alternatively, you might be able to identify that you’re earning more money from a specific category due to a rise in customer interest. If this increase keeps happening month by month, it could be time to consider what you need to do to keep up with demand. You might need to make larger supply orders or take on an extra employee to help with the added workload. If you don’t identify this pattern and respond too late, you could lose out on potential business.
Overall, a business budget might take time and effort to complete, but once you have it, you can make more well-informed decisions that will give you a strategic advantage.