From solopreneurs to Fortune 500 companies, every business relies on budgets to help them manage what’s coming in and going out. In simplest terms, a budget is a plan that estimates the revenues and expenses of a business over a period of time, typically monthly, quarterly, or annually. Building a budget requires patience, creativity, and thoughtfulness, but it’s not as daunting of a task as it may seem.
Why small business owners should create a budget
Budgets force you to plan, track progress, and keep it real. Operating a business without a budget is a lot like running a marathon…blindfolded. In other words, you likely won’t end up where you expected. Let’s jump in!
Plan: budgets help you understand where you are, where you want to be, and what needs to happen to get you there.
Track progress: prevent overspending, identify areas for improvement, and keep your business afloat.
Keep it real: budgets are a great way to set expectations and keep your team aligned.
In short, budgets help small business owners get a real-time assessment of their company’s financial health. Without a budget, it’s dicult to tell if your business is growing.
The five steps
Calculate your revenue (or projected revenue). Revenue is the amount of money a company receives from its clients/customers/users. In other words, it’s the money that someone else is paying you for your goods or services.
Revenue is often the most important line item in a budget; it’s the fastest way to tell how your business is doing.
Revenue growth should be consistent over time. Unexpected spikes or drops in revenue are a good indication that something unusual is happening.
If you’re a new business, don’t be afraid to make assumptions, but remember to keep it real and back yourself up with data
How to calculate revenue: number of sales x average price
Another easy equation: number of clients x average fee
Calculate fixed costs. A fixed cost is a business expense, such as rent, that is constant whatever the quantity of goods or services produced.
Fixed costs are expenses that a business pays each month. The frequency and value of these expenses are independent of success or any setbacks a business encounters.
Examples of fixed costs are rent, insurance, and certain utilities (i.e. internet). This means fixed costs are not influenced by the company’s production of its goods or services.
As long as you’re in business, you’re going to have fixed costs. It’s important to include a clearly defined list of these expenses in your business’s budget.
Calculate variable expenses. A variable expense is a business cost that flexes higher or lower on a monthly basis, typically tied to the quantity of goods or services produced.
Variable expenses are costs that flex higher or lower on a monthly basis. Unlike fixed costs, variable costs are typically tied to the production or adoption of a company’s goods or services — they are greater when production/adoption increases and lesser when production/adoption decreases.
Other examples of variable costs include unexpected expenses, like office supplies and business travel.
It’s often easy to overlook variable costs, especially if they’re infrequent. However, a thoughtful variable expense budget will help you stay on track as your company grows.
Set aside a contingency fund. A contingency fund is a pool of money reserved for unexpected costs and changes to your market.
Like a personal savings account, plan to invest a portion of your company’s revenue in a contingency fund every month.
With a contingency fund, your business will have the balance needed to leap over any unexpected hurdles.
Connect the dots. Now it’s time to connect the dots with a Profit and Loss (‘P+L’) line. This section of the budget summarizes your revenue, fixed & variable costs, and contingency fund. It’s the Cliff Notes of your company’s finances.
To build a P+L line, subtract fixed and variable costs from forecasted revenues.
As time progresses, it’s important to monitor your budget to ensure you’re staying on target. Be sure to record any usage of the contingency fund so you’re making decisions with up-to-date information.
Download this eBook to learn more and get a free budget template
Skip the stress. We have your back with five easy steps to build a budget for your small business. From a budget template to thoughtful cash flow management tips, this guide will help you connect the dots so that you can focus on creating, solving, and growing your business.
Who is this eBook for?
If you’re a solopreneur or small business owner, this eBook is for you. It doesn’t matter if you’re a company of one, five, or fifteen; possessing the know-how to budget for your businesses is a must-have.