Staying on top of finances is one of the best things you can do to help your small business thrive. Financial statements can demonstrate your business’s financial health when applying for funding, but it’s important to keep track of finances internally as well. A business budget can help you do this by summarizing your income and expenses to show how much money your small business has.
Clutch reports that the smallest businesses are least likely to create a budget, meaning that many small businesses are skipping out on essential financial planning. Building a budget is useful for making informed decisions about your small business and preparing for its future. With the guidance of your business budget, you can figure out where you need to spend more or less money, your financial resources available for day-to-day operations and long-term projects, and steps for managing debts.
The information included in your budget may vary depending on the needs of your small business, but these steps should be the same.
- Determine revenue. Establish how much money your small business makes monthly. This should include money that comes in from all revenue sources, such as sales, external funding, bond or share offerings, and asset sales.
- Identify expenses. Figure out how much money leaves your business monthly. This should include both fixed and variable costs. Fixed costs are those that you expect and remain mostly the same over time, such as rent, employee salaries, debt repayments, and taxes. Variable costs are those that may change, such as materials, shipping and distribution depending on sales, hourly employee wages, and utilities. Add the cost of all expenses together, then subtract the total from the revenue total.
- Set aside some money for unexpected expenses. It’s better to have funds for emergencies and not need them than to need them and not have them. Include a section in your budget for expenses you can’t plan like equipment repairs.
- Calculate profit. The result of subtracting your total expenses from your total revenue is your profit. If the result is a positive number, your small business is making a profit. If the number is negative, your small business is losing money.
- Adjust the budget as necessary. This step is dependent on your small business’s profit. If you’re happy with the profit results, you might choose to remain consistent with your business’s current spending. If you’d like to see more profit, you might try to see where you can cut expenses. If the profit result is negative, your small business will have to make some changes in expenses to keep the business afloat.
A budget can help keep your small business on track to meet your goals. By taking steps to consider your business’s finances now, you can set your small business up for future success.