Creating a Budget for Your Small Business: The Basics

Your small business budget is one of the most powerful planning tools you have, as long as you use it well. Along with your business plan, the financial blueprint you create with your business budgeting software will help you make important decisions and assist you in staying on course throughout the year.

What is a small business budget?

In basic terms, a small business budget estimates both your revenue and expenses for a particular period of time. It shows how you plan to allocate your resources in the future.

Revenue can come from sales, accounts receivable, interest and other sources. Expenses are what you pay out for materials, rent, utilities, payroll, marketing and other fixed and variable costs.

Why create a budget?

Planning for the future. How much can you afford to spend on marketing? Will you be able to expand operations this year? Budgets show business owners how to use revenue to achieve their business goals. They also give insight on probable expenses that the business will face in the coming year.

Cash flow management. Business owners can carefully monitor their input and output by comparing it with their budget. This will allow you to assess cash flow - for example, are you collecting money from customers long after you have paid for the goods they have purchased? Once you identify cash flow gaps, when outflows are greater than inflows, you can take steps to close them.

Securing financing. Banks and other lenders will want to examine your budget before they agree to give you a loan.

How often should I budget?

Many budgets are based on a company's fiscal year. However, you can use your business budgeting software to create a monthly, quarterly or semi-annual budget which will give you a more detailed view of your company's finances. A number of experts suggest that a monthly budget is most useful for staying on track.

How do I create a budget?

Your business budgeting software will provide you with a structure for inputting expenses and forecasted income.

Revisit previous budgets. If you have created a budget in the past, you can use it as a model and adjust the numbers as needed.

Do research. If you are in the process of starting your business and don't have a previous budget to use, you can do research into typical costs and sales trends associated with firms in your sector and come up with forecasted averages.

Keep it simple. There is no need to list every expense in great detail—accounting for different categories such as supplies and utilities should be sufficient, rather than breaking it down into paper clips, light bulbs and other specific items. If you want, the categories in your budget can be as simple as sales, earning, accounts payable and accounts receivable.

What do I do with my budget?

Some business owners create a budget and then set it aside, essentially forgetting about it until it comes time to make another one. But to get the most value from your budget, you should refer to it at regular and frequent intervals, making changes based on what you've learned.

Compare forecasts with actual numbers. Your business budgeting software has a column for inputting your actual spending and income at the end of the month, quarter or other time period. It is essential to revisit your budget on a periodic basis to evaluate this number and see whether your planned figures diverge from the actual. Make this a regular part of running your business

Reassess and learn. Once you have compared anticipated spending with actual expenditures, you can look for reasons why some figures may not align. Are there seasonal sales variations? What is the country's current economic situation? Then, you can look for ways to use this information to improve your business and create a more accurate budget for the next period.

Question expenses. Once you have all of your various expenses detailed in your budget, it is easier to reevaluate each one and determine how you can save. Can you find better deals on internet services or office supplies? Shop around and see if you can trim your budget even a little bit.

Be flexible. A budget, although a useful tool for remaining disciplined, is not set in stone. You should not use your budget as an absolute ceiling to how much you can spend but is instead a tool for making sure you are meeting your business goals and can justify any departure. If you see that changes need to be made, do so.

In the beginning, planning a small business budget may seem like an onerous task. But, over time, you will begin to see how this simple planning tool actually takes much of the stressful guesswork out of running a business and makes operations function more smoothly.
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