Running a small business requires managing many tasks and responsibilities. As a result, you might be so busy focusing on the day-to-day running of your company that you neglect to look at the big picture. For example, do you have enough financial resources to meet your quarterly and annual goals? Can you afford the necessary inventory and supplies for the upcoming period? Do you have enough cash flow to meet your company's operational costs?
If you have and maintain a budget for your business, you will know the answers to these and other finance-related questions. Simply put, you can run a small business more effectively with a budget. This Huddle Business Capital blog article explains how to create a business budget.
A business budget is a financial document that outlines a company's projected income and expenses over a specific period, typically a quarter or a fiscal year. It is an essential tool for strategic planning and decision-making, giving business owners the foresight to allocate resources and achieve their financial goals.
A budget also helps business owners pinpoint potential cash flow issues before they occur. For instance, cash flow may be impacted if a business experiences periods of revenue shortfall or has significant expenses or investments. Being able to forecast income and expenses helps business owners plan accordingly to maintain stability. Plus, having a budget enhances accountability within the organization. It encourages each department to operate within its means and be disciplined with its spending.
Creating a business budget may seem complex and time-consuming, but proper planning and attention to detail make it easier than you might think. Just think of the basics of budgeting in every aspect of life and apply them to your business. For instance, you keep track of your expenses (rent, mortgage, utilities, groceries, car payment, entertainment, etc.) based on your income and reduce spending when necessary. Or, you set aside money each month for a future purchase or vacation. A business budget operates similarly, albeit on a larger scale, with more information.
The following are the steps involved in creating a budget for your business.
When you're faced with a blank computer screen and the task of creating a budget for your business, it's natural to feel overwhelmed and frustrated. The good news is that many business budgeting templates, spreadsheets, and software programs are available to streamline the budgeting process and make it more manageable. Utilizing these tools and resources can take the stress out of business budgeting and gain better control over your company's financial situation.
Your budget needs accurate financial information, which is found in your company's various financial documents. Start by reviewing your company's income statement, which features your revenues, expenses, and profits (or losses) over a specific time frame. Next, examine your expense report to gain insights into your business's operating costs. Finally, analyze the balance sheet, which details your company's assets, liabilities, and equity.
Once you have gathered your company's financial documents mentioned in step #2 and verified their accuracy, you can input specific financial data into your budget template, spreadsheet, or software program. The main numbers to input in their respective columns or sections are income (revenue), expenses (costs for rent, utilities, employee payroll, equipment leases, etc.), assets (real estate, equipment, business vehicles, etc.), and cash on hand.
You can create a forward-looking budget once your company's financial information is added to your budget template, spreadsheet, or software program. The information you add will serve as the cornerstone of your budget planning. It shows you how much money you spend on operating your business in a specific period, how much you can invest to grow your business, and how much money you can pay yourself and your workers. By looking at your company's income, expenses, and assets for a previous quarter or year, you can develop a budget for the upcoming period.
As your business grows, it is essential to utilize flexible budgeting strategies that align with your expanding operations. A static budget can quickly become outdated, leading to missed opportunities or financial strain. To ensure your business thrives during the growth phase, consider scaling expenses by regularly reviewing and updating your financial plans. If your budget reveals product or service offerings are not generating a solid return on investment (ROI), consider scaling back on them.
One key benefit of having a business budget is that it helps you identify areas where money is being misspent. Check your spending patterns on things like inventory, office supplies, software subscriptions, business insurance, marketing, and meals to identify opportunities for cost savings and improved financial management. Many businesses spend excess money on these and other expenses, and a budget is an excellent tool to find out where.
When making your business's revenue projections, it's important to be realistic and consider all potential expenses and income. Make sure you don't underestimate costs or fail to account for fluctuations in income, as many businesses experience seasonal variations that can affect cash flow. Plus, consider your business's financial performance of the previous quarter or year when setting revenue projections. And while it's great to be optimistic as a business owner, overestimating revenue can lead to overspending and financial strain, so be realistic.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.