How To Create A Proper Budget For Small Businesses
Running a business without a proper budget is a recipe for failure. While one-person ventures might get away with winging their operations, the complexities of a growing business require the financial order a budget provides.
Why does your business need a budget?
1. It guides your business decisions.
2. It is a way to confirm the competency of your business management to investors and banks.
3. It is the basis for managing expectations and making reasonable financial projections.
What should be in your budget?
1. Revenue: Basically, all the money your business makes. When you're making an estimate of your revenue, keep it on the low side. It is better to plan with an underestimated revenue than to come up short because you were too optimistic.
2. Costs: What it takes to run your business, categorised into fixed, semi-variable and variable costs.
Fixed costs, such as rent, remain the same regardless of changes in sales or revenue.
Semi-variable costs, such as the cost of phone calls, might change depending on sales.
Variable costs, such as the cost of transportation, change with changes in sales.
3. Profits: You get this figure by deducting your estimated operational costs from your estimated revenue.
How do you create a budget?
1. Set your revenue and profits targets, making allowances for factors that may affect those targets. If your business is at least a year old, use the information in your financial statement(s) as a guide for making educated estimates.
2. Estimate your operational costs. If you do not have a financial statement to provide a basis for estimating operational costs, be sure to include all projected expenses of running your business in your budget.
3. Calculate your profit margin by deducting estimated operational costs from estimated revenue.
4. Make adjustments as needed. Budgets are based on estimates, and because markets and the economy change, they are not set in stone. Look over the figures in your budget from time to time, prepared to alter them based on new information and changes in your business.
How has budgeting helped your business? Send your comment or tip to firstname.lastname@example.org, we may publish it with full credit and a mention of your business.