These step by step steps will make your Business Budget as easy as possible. You will see that the business budgeting process starts by looking at your past income and expenses. The longer you’ve been in business, the easier this process will be, as you’ll have more data to analyze again when you budget in the coming year.
However, if your business is new, you may need to do more extensive research on the costs that are common in your industry or area to gather data for your financial estimates. Whether you’re gathering information from within your own business or making forecasts based on research, there will be steps you need to take in creating your first work budget. You’ll see how easy it is to budget for a business when you follow the steps below.
Step 1: Check Your Income
The first step in creating any budget is to look back at your existing business and find all your sources of income (aka income). Add all of those sources of income together to identify what comes into your business each month.
When you find your income, be sure to calculate revenue, not profit. Your income is all the money that goes to the business before expenses are deducted. Profits are what is left after all costs have been deducted.
Once you have identified all your income streams, calculate your monthly income. It’s important to do this for a few months – and preferably for at least the previous 12 months, provided you have lots of data available.
With 12 months (or more) of information, you can check how your monthly income has changed over time and look for seasonal patterns. Your business may be in a slump after the holidays, for example, when it’s just the start of the year. Knowing about these seasonal changes will ensure that you can prepare in advance for the more difficult months, thus giving you financial comfort.
Step 2: Reduce Fixed Costs
The second step in creating a business budget is to add up all your fixed costs. The term flat fee applies to any expenses that are recurring required to operate your business. Fixed costs can occur daily, weekly, monthly, or even annually, so make sure to get as much data as you can.
Examples of fixed costs in your business might include:
– Payment of debt
– List of salaries
– Depreciation of assets
If your business is unique you may have different fixed costs than those described here. Take a few minutes to write down any other fixed costs that may be associated with your business. Once you’ve identified your business’s fixed costs, you’ll deduct them from your income and move on to the next step.
Step 3: Determine Variable Costs
When you are looking for the data you need to list your fixed costs, you may also notice that there are some variable costs in your business as well.
Variable fees are fees that change depending on how much you use the service. Many of these are necessary to keep your business operating, such as utilities.
Some examples of variable expenses are:
– Owner salary – Replacing old equipment
– Office equipment
– Additional professional employees
– Marketing costs
During the months when business is down, you should lower the variable costs of your business, starting with the expenses you don’t have to spend. However, during favorable months when there is additional income, you can increase your expenses on variable expenses with the goal of making a long-term profit in your business.
There are 3 steps we learned earlier to easily create a business budget. (Read: How to Easily Make a Business Budget Part 1 ). Now we learn the next 3 steps.
Step 4: Assign a Contingency Fund for Unexpected Expenses
Whether you’ve run a business before or not, we all know there can be a one-time, one-time expense that is incurred at an unexpected time. For example the day before you host your whole family for a New Year’s event and the fridge goes out. Or when you’re on your way to the biggest presentation of your career and your car breaks down, it can’t start.
These costs arise when you least expect them and usually when budgets are tight. Prevent the fear of unexpected costs when budgeting for your business by making sure you have extra cash and planning to have contingent funds in your budget.
While you may be tempted to spend any of your surplus income on variable expenses, keep some of it in an emergency fund. That way, you’ll be ready when equipment breaks and needs replacing, or you need to quickly replace inventory damaged by a flood. Of course, there are always options for small business loans – but more options are better than few.
Step 5: Create your Profit & Loss Statement
Now that you have gathered all the information above, it is time to put it all together to create your profit and loss statement, or Profit & Loss.
Just talking about P&L can lead to feelings of concern about the outcome. But remember, you’ve done everything step by step. These are additions and subtractions: add up all your income for the month and add up all your expenses for that month. Then, subtract expenses from income and hope that you get a positive number at the end.
If so, you make a profit! If not, that’s a loss – and that’s okay too. Business is not always profitable every month, especially every year. Especially when you are just starting out as a business.
Step 6: Build Your Business Budget Going Forward
Whether you are a new businessman or have been doing this for a long time, projecting what will happen to your business in the future is an important step. If you’ve been in business for a while, it will definitely aid accuracy in making those predictions.
Now that you’ve created a P&L – which is a historical report that shows your business’s past – it’s time to build your budget and it’s a forward-thinking, future-focused report. Creating P&L projections will help you better understand the seasonal ups and downs of your business, which investments in your business are worth repeating, and what you should avoid in the future.
Some of the existing trends can be used as a basis for budgeting, for example:
Seasonal trends due to bad weather, natural disasters or economic turmoil
Seasonal trends due to school calendars, travel patterns, or limited supplies
When examining your P&L, you will need to do an analysis to explain fluctuations and changes in your business. Knowing the most favorable months will help you predict what your next year will be. You can also take that information and decide to hire more staff and extend your working hours during certain times of the year, which can make your business even more profitable in the most demanding months.