By Lidia Staron
Creating a budget can be a daunting task, especially if it’s the first time you’re creating one for your business. However, the actual mechanics of doing this are not so complicated. That said, it’s important to keep certain things in mind to make it a successful one that will help you grow your business and see it prosper.
Victor Butcher, the former president of the Memphis Chapter of the Tennessee Society of Certified Public Accountants says a budget “…it’s like a roadmap for your company. You need the roadmap to understand where you’re going with your business.” But how to create this road map?
1. Figure Out Your Income
Your income will be formed by your sales and
any other additional sources of earnings. If you are just starting from scratch
with your business, you can make an estimate. However, you should try to be as
accurate and realistic as possible.
On the contrary, if you have already been in
business for a year or more, then you should study at least the past 12 months.
This will allow you to consider any seasonal changes that might take place. For
example, if sales increase around Christmas time and suddenly dropped in
January, or if you saw more activity during the summer months than during
winter. This way you could consider adjusting your budget according to these
It’s better to be conservative and
underestimate your income, especially at the beginning, than to overestimate
it. Especially because this will affect the rest of your budget, as you will
2. Determine Your Costs
This is another way to say that you need to
know what your expenses are. There are different types of expenses:
- Fixed: Fixed costs correspond to consistent spending. These are things that are going to continue costing you the same for the foreseeable future. Here you can include rent, services, insurance, and more. The best way to check your fixed costs is by checking your prior bank statements.
- Variables: These correspond to the volume of your sales. For example, raw materials, freight costs, commissions, marketing costs, and the like.
- Semi-variables: These are fixed costs, which can turn into variables. This happens when the work volume increases or decreases. Examples of these are salaries, expenses in phone bills, special marketing campaigns, and others.
3. Factor In One-Time Expenses
These are usually unpredictable expenses, such
as replacing a computer that broke down. However, they can also refer to a
planned expense, such as attending a work-related conference. These are not
included in your other costs because you should have a special fund solely
destined for any one-time spending that might arise.
4. Determine Your Profit
Your profit is the result of subtracting your
costs from your income. This is the actual money you’re making with your
business. Once again, if you’re a brand new business, you can make an estimate,
which should be as accurate as possible. To do this, the Small Business
Administration recommends doing research beforehand. You can reach out to
associations in your trade or bankers to verify your estimated profit.
Even if you’re already an established
business, you could make sure your profits are what they should be when
compared to other businesses of your size in your industry.
Furthermore, there is the possibility that
your balance is a negative one, meaning you’re having losses instead of making
a profit. However, this is something that usually happens as your business is
getting started. Therefore, don’t see it as a sign of failure or despair over
it. What you can do to aid this is to identify the reason, and if necessary,
adjust your budget consequently.
5. Keep It Updated
Now that you’ve followed these simple steps to
create your budget, you need to follow-up. You should input your monthly
expenses and earnings to see if and how they match with your original budget.
This way, you’ll be able to consider adjustments. Some of these could be
cutting down on variable expenses, or getting personal loans online to make
things even if you went over budget. Conversely, if you see that your profit is
increasing, you could make timely investments.
6. Use the Tools You Need
You must keep up with your budget. As your
business grows, you might find yourself in need of software tools that might
help you run things smoothly. Numerous platforms offer reliable results, and
they’re designed to be easy to use.
The Benefits of Budgeting
As you can see, creating a budget will allow
you to make a business plan that goes in hand with your reality. Despite this,
a Clutch survey comprised of 302 businesses found that 61% of small businesses
did not create a formal budget. Furthermore, they also found that almost 40% of
those who did went over budget during the first quarters of the year.
This tends to happen when the estimates for
income and costs are not realistic. However, this analysis allowed these
businesses to adjust, which is likely the reason why they didn’t continue to go
over budget during the rest of the year. This is the result of keeping your
budget correctly updated.
Another benefit of budgeting is that, on
occasion, bankers might want to see what your plan is and how you’ve budgeted
for it. Having it ready will be one more sign of your preparedness and
Contrary to what many people believe, it might be a good strategy to let your employees know about your budget. This way, you are giving them a goal to be met, which can increase their motivation and performance.