It's a common saying that "you need money to make money," but more than that, you need to know how to spend your money to make money. That's why it's important for every business - no matter how small - to have a budget.
How to Set Up Your Budget
At the most basic level, your budget should be divided into months, rather than lumped into one year, so you can assess your finances as the year goes on. There should be a column for each month's expected budget, as well as each month's actual expenses. Some people prefer to have a third column for the variance each month (to make notes such as "5% over," or "$700 under").
Key numbers you'll want to keep track of in your budget include:
- Fixed costs - Fixed costs that don't change from month-to-month, such as rent for your office space, payments on a company car, and premiums on business insurance and health insurance
- Variable costs - Costs that change depending on your needs, such as the cost of replenishing inventory, shipping, electric bills, office supplies
- Semi-variable costs - Costs that are generally fixed, but change based on the demands and volume of your business, such as salaries and advertising
- Sales/Revenue - It's hard to estimate sales, especially if you're a new business. If you're an established business, you may be able to estimate sales based on previous years. If you're a new business, you can use market research to try to determine these figures. Always err on the side of caution though, and estimate revenue on the lower end of the spectrum; it's better to be pleasantly surprised than to be let down.
- Profits - This number is what you get when you subtract your costs from your sales and revenues. This number allows you to see what you can reinvest in the company and what you can take home. It also allows you to see if your budget is working, or if you need to decrease expenses or work to increase revenue even more.
Spend some time brainstorming to figure out what all of these costs might be - you don't want to get surprised later on by a cost you forgot to plan for when doing your budget.
It may seem counterintuitive, but you want to work backward on your budget. Start with a target profit (which can be based on market research or on previous years' financial statements) to find out how much revenue you will need, so you can then determine the amount of operating expenses you can afford.
Plenty of great resources exist online that will help you craft the perfect budget for your small business. Use these tools so you don't have to start from scratch.
- SCORE Business Plan - SCORE, a nonprofit association that helps small businesses succeed, offers a free business budget template that you can use to get your budget started.
- Online Sales Tracker - If you're selling items online, and you're not totally sure of what your revenue is, this template can help you break down the cost of the item, the cost of shipping, and your actual revenue from the sale.
- IdeaCafe's Budget Calculator - This website, meant for startup businesses, helps you calculate what your expenses might be so you can figure out your budget. It allows you to factor in your estimated income so you can see if you need to start looking for more financing.
Keep Your Budget Up-To-Date
At least once a month you should look at your budget to determine whether you're sticking to it. If you consistently find that you're not, it's a good indicator that you need to adjust your estimated budget for the rest of the year - whether you need to hire more people, increase your inventory, or make cutbacks.
You can also use a budget to track whether certain costs are paying off. If you add an employee, do your revenues increase over the next few months? If you launch an advertising campaign, you can use your budget to track whether your sales go up. You can use this kind of information to help you make decisions about these costs in the future.
Don't Forget the Unexpected
No matter how well you plan your budget, remember that there can always be big changes - both good and bad - that will require you to rethink your business's finances. Even the most seasoned business owners get surprised, so don't be afraid to rework your budget as needed to keep your business on the right track.