Wednesday, July 12, 2017

Do you know how much money you need to keep your business up and running and continually thriving? If you don’t know these numbers and you are not budgeting your expenses, you risk stagnating your growth and suffocating your ability to sustain profits.

A small business budget is a necessity if you want to track growth and expenses, stay in control, and avoid surprises. A budget will also give you a clear picture of where your money should go so you know exactly how much to invest or pull back to sustain growth and momentum. A budget is even a necessity if you are a new business owner and not yet enjoying large revenue, as it will set you up nicely for future growth.

Without a budget, you may also be blindsided by unexpected events that can threaten your business’s livelihood. By committing your numbers to paper, you keep yourself accountable and you can also more easily anticipate future needs, helping you derail future problems before they occur. 

A small business budget will allow you to take a step back and view your business from a higher vantage point. You will notice opportunities for growth and have the ability to re-allocate funds to better promote that growth. 

How to Start

The ultimate goal when building a small business budget is to create revenue, profit, and expense projections and match up your actual expenses to those numbers. This way, as time goes on, you know where you can invest more or pull back to meet those revenue projections. 

By creating a clear plan for your outgoing spending, you can easily project future revenue and also avoid overspending which leads to losses.

The first step to creating a small business budget is to perform a deep audit of all of your business expenses. This is important because you need to know your current costs to be able to effectively project future costs and revenue. 

Perform an audit

Check your financial records and add all of your expenses to a spreadsheet. Record every operating expense necessary to run your business at 100% and use your past expense history as a guide as well as any expenses you expect to incur in the near future. Record every expense, regardless of how big or how small. If you just started your business, do your best to estimate your potential business costs.

Your budget will include revenue income and several categories of expenses, whether they are fixed, variable or one-time. As stated, use your current and past expenses as a guide and also estimate future expenses and revenue at least 12 months out. 

Components of an Effective Budget

The components of a small business budget include the following categories: costs/expenses, revenue, and profit. The next step is to come up with numbers for each of these categories and list them in your spreadsheet. You may not know every expense as they may change over time, but do your best to estimate based on past history and current projections.  

Let’s take a closer look at these categories:

Revenue

To project your sales and revenue, list your expected and desired revenue for at least 12 months out. Base your estimates on last year’s sales figures. If you are a new business, base your estimates off market research. For your market research, factor in the price of your product, potential market, and projected expenses. Also, consult with other business owners in similar industries to get a better idea of potential industry revenue.

Be conservative with your revenue projections, especially if the current economy is in a downward spiral. Also, though your numbers will not be exactly right, be realistic with your estimates. If you are a new business owner, it may not be realistic to estimate one million in revenue for your first year. The same principle applies if your business made under $100,000 last year. You can inflate the numbers if you expect a large deal upcoming or a boost from another resource, but err on the side of underestimation. 

Here are some examples of revenue categories: 

  • Product sales
  • Investment interest and income
  • Consulting income

Costs/Expenses

Once you determine your sales projections, list the expenses you will incur to keep your business up and running. Calculating expenses is a little more straightforward than estimating revenue, as you have harder numbers to go by. Expenses can, however, be variable due to inflation and vendor price changes. To help, categorize your expenses into two categories: fixed and variable.

Fixed Expenses

Fixed expenses are those that will not change over time. They are ongoing and expected. Here are some examples of fixed expenses:

  • Salaries and wages
  • Employee benefits
  • Taxes
  • Rent/Lease
  • Utilities
  • Technical (internet, phone)
  • Subscription services (email services, voice broadcasting, hosting)
  • Legal
  • Regular Travel
  • Postage
  • Regular fees (bank/credit card)

Variable expenses 

Variable expenses may occur monthly but their costs are not fixed. They will vary over time. These are the expenses businesses will often adjust in the budget depending on whether actual revenue exceeds or falls under expected amounts. Here are some examples of variable expenses:

  • Variable travel
  • Marketing/advertising
  • Contractor payments
  • Training
  • Vehicle expenses
  • Installation/repairs
  • Sales commissions

One-time expenses

One-time expenses are those that are required to keep your business up and running but they are not ongoing. The good news about one-time costs is you can readily prepare for them, in most cases. Here are some examples of one-time expenses:

  • Computer equipment and accessories
  • Desk and office equipment
  • Company retreats
  • Office furniture and supplies

Profits

Subtract your costs from your revenue to estimate monthly profits. The profit numbers are the real measure of how well your small business is doing. Each month, calculate your actual profits and match them up against your budget. Adjust accordingly to continually strive to match or exceed your profit budget estimates.

Quick tips

Consult your budget with every decision you make for your small business. For example, if you need to hire a specialist or purchase new equipment, by consulting your budget you can determine how much you have to spend so you stay on target with your revenue projections and you do not spend money you don’t have. 

Underestimate and overestimate

When coming up with numbers, underestimate your revenue and overestimate your expenses. It’s impossible to predict exact numbers, especially with revenue, so padding the numbers will help to eliminate future surprises that could hurt your business profits. 

Pulling it all together

Avoid abandoning your small business budget. It can get tedious reviewing it, but it is an essential component of your business’ growth. Abandoning it could result in stunted growth and unexpected negative events. Review your budget on an ongoing basis, monthly if possible. Match up your actual expenses, revenue, and profit with what you budgeted. Are you over or under your budget? If your expenses exceed your revenue, you may need to cut costs and re-evaluate next month. Stay in a positive cash flow as much as possible. Otherwise, you may need to secure a small loan to pay back in the future.

The numbers will never be exactly right, so don’t worry. Small business budgets are not tests that you can pass or fail. Making mistakes is part of the process, especially if this is your first year budgeting. Be flexible with the process as you will learn by experience. You may make multiple adjustments the first year you budget and find that your second year budget is easier to adjust.

Conclusion

Small business budgets give you control over your finances and help you steer your business instead of it driving you. Budgets can keep you from sustaining business losses simply because you will know where every penny is going allowing you to see exactly where you need to adjust to keep the company profitable.

Don’t neglect this important step. Without a budget, you are prone to mistakes you may have been able to prevent had you created a small business budget.

Here at CallFire, we offer these educational resources because our goal is to help you create an ideal environment for your business to grow and thrive. Our services were created with the small business in mind, as we know cost is a primary concern as you focus on expansion. 

Voice broadcasting is one strategy you can implement for your small business that is not only affordable, but it can also help you cut costs on time and manpower. With voice broadcasting, you can cut back on manual calls, and for pennies a call, set up automated messaging to blast to all of your customers in seconds. If you would like to find out how voice broadcasting can help you streamline your costs, sign up for a free account today.

We've created a free downloadable spreadsheet to help you build a better business budget. Download it below, and get started on the right path towards organizing your finances: One-Year Budget Worksheet.xlsx

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