Just as a personal budget can help you track income and expenses to make informed decisions, a budget for your business will help you organize your financials and stick to your business goals. Here, we look at how to create a budget that help you better run your business.
What is a business budget?
A business budget shows how much revenue you project for the upcoming year as well as your expenses, typically by the month. To be truly effective, though, it should be much more detailed, breaking down different revenue streams and expenses.
A business budget isn’t something you can create and then forget about for a year. Instead, you should update it regularly — monthly works for most businesses. For seasonal or high-product turnover businesses, weekly updates may be a better fit. Although it takes some time, you’ll find that you’ll have a much clearer understanding of how your business makes and spends money.
The information used in your budget can also help you generate other financials, such as cash flow projections and profit and loss statements. These financial statements provide a better understanding of your business’s standing and are essential if you apply for loans or business credit.
How to create an effective business budget:
1. Determine which software program you’ll use and create a budget annually
If you use bookkeeping software that includes a budget function, it makes the most sense to use that program to create your budget. Your figures will easily populate from one file to another, such as from your budget to your cash flow projections.
If you don’t currently use bookkeeping software, you can use a spreadsheet program, like Microsoft Excel, to develop a budget. Many free business-budget spreadsheet templates are available online.
It’s a great habit to create a budget a couple of months prior to the start of your fiscal year, so you can refine it as your new fiscal year begins and throughout the year.
2. Include key information like cash on hand, revenue and expenses
On the most basic level, your budget will include the amount of cash on hand at the start of your fiscal year, and the revenue you project to generate and the expenses that your business will incur over the year. Whatever is left shows your business’s profitability.
To make your budget truly effective, try to break the revenue and expense lines down further. The more detailed your budget lines are, the clearer the story they tell. Let’s look at what’s included in your revenue and expenses:
- Revenue is all the income for your business. While you’ll have an overall budget line that reflects the revenue for each month and the total fiscal year, breaking the revenue down even further into categories that make sense for your business will be a huge benefit to you as you plan.
For example, if you own a hair salon, you may have a revenue line for “services,” such as haircuts and colors, and a revenue line for “products,” for any additional items your salon sells, like shampoos and styling gels. Over time, it may make sense to break those down even further.
- Expenses represent all the cash going out of your business. This includes fixed expenses, like rent and utilities (and, for some businesses, staffing), that don’t vary by sales or service volume, and variable (or flexible) expenses, which include things like inventory or components that may vary based on sales volume or seasonal cycles. Variable expenses are usually reflected as cost-of-goods-sold, or COGS, on your business’s profit and loss statement.
As with revenue, breaking down your expenses can help you understand where your business’s money goes, which can help you plan more effectively. For example, instead of one line for “marketing,” you can have a line for “digital marketing” and a line for “print marketing.” This will help you develop ways to track your return on investment (ROI) for each area, and decide how to invest your marketing dollars going forward.
3. Use the information to strengthen your financial foundation and build your business
Each month, your budget will be populated with income and expense information that can help you gain a much clearer understanding of your business. At the end of the year, you’ll see how accurate your projections were, helping you plan for the following year. With this information, you can make wise decisions that keep you focused on your business’s core products and services or identify profitable ways to pivot, if needed. You’ll learn
- Whether your business is cyclical or steady year-round: A retail store, for example, may be well aware of winter-holiday cycles, but may discover a previously unrealized seasonal opportunity at the end of the school year. These changes mean that you can leverage opportunities for increased sales or reduce your costs for slower cycles that you hadn’t previously identified.
- Opportunities for growth: Your budget helps you see which income lines offer the highest profit margins or volume, so that you can determine the best mix of sales to increase profitability (online sales vs brick-and-mortar or products vs. services). You may also discover growing areas that you should invest in.
- Where resources aren’t used efficiently or effectively: When you break down your expense lines, you’ll find products or services that may not provide a reasonable return on your investment. Your budget helps you ensure that your cash investments and time are supported through real information and helps you avoid mistakes that sidetrack businesses and derail finances.
Pursuit can help
If you’d like help creating a budget or other financials and want to learn more about how funding can help ease your cash flow and open opportunities, contact us today.