How do you create a business budget, and how do you make sure it’s on track? There are several elements that are key to creating an effective business budget, but it can seem overwhelming if you don’t know where to start.
In this guide on how to create a business budget, we’ll talk about the elements of a good business plan, how to find the right financial tools, and much more! Let’s get started!
Analyze costs
Start by analyzing costs. Figure out the cost of your goods or services, any marketing you will need to do, salaries for yourself and anyone else who will be in charge of running your business, taxes, utilities like internet and phone bills, office rent (if applicable), etc.
Keep an eye on these costs as they change over time so you can adjust your budget accordingly.
Next make a list of all the expenses that are associated with operating your business. These might include inventory or supplies that need replenishing regularly such as soap in a restaurant; regular payments like rent or electricity; equipment purchases like computers or printers; or tools you’ll need for production such as sewing machines for clothing designers.
Negotiate costs with suppliers
It is recommended that you always negotiate costs with suppliers before committing to purchase. This could be done by negotiating special discounts, free shipping, or other benefits that may lower your overall cost of goods.
It can also be beneficial to negotiate discounts for larger orders since it will help offset the cost of carrying inventory, storing inventory, and finding customers. Furthermore, you may want to consider negotiating terms like net 30 which means the payment is due in 30 days after shipment instead of the typical payment terms of net 60 or net 90.
This way your business won’t be pressured by overdue payments from suppliers and will have more time to sell their product if they are not able to pay in full on time.
Estimate your revenue
The first step is estimating your revenue. This is the total amount of money you will make in one year, or what’s called the annual revenue. You need this number so that you know how much money you’ll need in order to keep your business running.
For example, if your annual revenue estimate was $100,000, then you would need $8,333 per month for expenses. If your annual revenue estimate was $5 million, then you would need about $417,000 per month for expenses.
Estimating your revenue isn’t easy but it’s very important that you get it as close as possible before even thinking about creating a budget.
The second step is estimating the costs of starting and operating your business. There are many things that can come up during the course of your day-to-day operation and at the start up phase such as utilities, furniture, equipment, marketing/advertising costs, etc.
These items will vary depending on the size and complexity of your business which means there are no set rules when estimating these numbers – some may cost more than others but they should all be included when estimating your revenue.
You also have to consider whether you’re going to hire employees or not (if yes) because those wages come out of gross revenue too which means they must be calculated into an estimate.
Finally take into consideration your personal time investment – do you have time outside of work hours available? Do you have any personal obligations? All these factors add up!
Know your gross profit margin
Knowing your gross profit margin is the first step when it comes to creating a business budget. Knowing this percentage means that you know what your business will earn before paying for its expenses.
Some companies calculate their gross profit margin as net sales minus cost of goods sold, divided by net sales. Other businesses calculate their gross loss margin as cost of goods sold minus the gross profit margin, divided by net sales.
A company’s gross profit margins are based on the nature of its products or services, its geographical location and its operational capabilities.
For example, an online clothing store might have a higher gross profit margin than an auto parts retailer because they don’t have any material costs associated with product delivery.
An easy way to know your gross profit margin is through QuickBooks Online – simply log in and look at the Your Gross Profit Margin % field under General Company Settings.
After knowing your gross profit margin, create a list of all possible expenses that may come up over the course of one year. Consider both fixed and variable costs when coming up with these items.
Fixed costs include items like monthly utilities payments and insurance premiums while variable costs may include expenses such as payroll each month or marketing campaigns throughout the year.
Project cash flow
The first thing you need is a clear understanding of your projected cash flow. Start by listing your anticipated revenue for the coming year.
Think about what projects or clients you’ll have, and how much they’ll cost in both time and money. Consider potential interest income if that’s part of your business model, as well as any other sources of revenue such as grants or crowdfunding campaigns.
This list will be your starting point when it comes to creating an annual budget. Next, list all the expenses you’ll anticipate over the course of the next year- everything from office space rental fees, to social media marketing costs, to travel expenses incurred while visiting clients or attending conferences.
Factor in seasonal and industry trends
Even if you’re running a very small operation on the side, there are many things that you’ll need to include in your budget. These items can include operational costs, overhead costs, fixed costs, labor costs and equipment costs.
In addition to this, factor in seasonal and industry trends. A large industry like construction will differ from say retail because of seasons. For example, for most businesses hiring during the winter months is going to be higher than it would be during the summer months because people are spending less time outdoors.
Designing your budget with these considerations in mind will not only help you get an accurate assessment of how your business is functioning but also allow you to make any needed changes as they come up.
Set spending goals
A business budget is an excellent way to set spending goals. For example, if you know you’ll need a new computer in the next year or two, put that purchase on your budget now so you can avoid paying full price later.
It’s important to create a budget that reflects what your business needs are and not just what it wants. Once you’ve made your list of expenses, set aside money for them by transferring funds from one account to another on your business bank statement or adding it directly from your personal bank account into the company’s checking account.
If you need help with this process, consult with someone who specializes in creating budgets for small businesses like a financial advisor or accountant.
Bring it all together
We’ve covered everything you need to know about creating a business budget, from the difference between income and expenses, how to calculate them, what tools are available for tracking your money as well as how to put it all together. Now it’s time for action! The best way to bring it all together is in an accounting software like QuickBooks or Quicken.
If that feels too complex or daunting at first, start with a basic spreadsheet program like Excel. It’s free, easy-to-use and there’s no limit on how many rows you can have across each column.
For a more comprehensive understanding of creating a business budget, we’ve bring an insightful video. In this video, you’ll gain valuable insights and practical tips from an experienced expert in the field.
Watch as the consultant breaks down the budgeting process step by step, offering clear explanations and actionable advice. Whether you’re just starting your business or looking to improve your financial planning skills, this video is a valuable resource.
Take a few minutes to watch the video below and enhance your knowledge of budgeting for business success.
Conclusion
Good budgeting can lead to success in any business, from brick-and-mortar stores to budding entrepreneurs. And with so much information out there on how you should go about it, the challenge lies in picking which advice you want to follow.
Our conclusion? Test what’s best for your company. Knowing that different budgets work for different people, it’s important for every entrepreneur out there to find what suits them best. Get started on your journey now by following our tried and true tips–so whether you’re an early stage startup or a long-running retail store, business success is within your grasp.