Failing to create a budget or stick to it has been the downfall of many small businesses. If you’re avoiding the task, it’s important not to make the process more challenging than necessary. Creating a business budget simply means that you’re using past data to estimate future business performance.
An accurate budget helps you foresee slow months and set money aside until business picks up again. It also helps you gain a realistic sense of how much money you need for operation costs and prevents you from overspending. Following the six steps below can greatly simplify the process of creating a business budget.
Know Where Your Money Comes From
Start by looking at sources of income for your business and adding them together. This gives you an idea of the revenue your company takes in each month. Revenue is not the same as profit, a figure that you arrive at after deducting expenses. After calculating an approximate monthly income, look back at least 12 months to determine income patterns.
Determine Your Fixed Costs
Fixed costs are recurring amounts you must pay to keep your business operational. Some common examples include:
Repayment of debts
You should now add all fixed costs together and subtract them from your business income.
Include Variable Expenses
Variable expenses change depending on how often you use the item or service. Some examples include the cost of heating and cooling, marketing, and educational fees. It’s important to cut back on these expenses as much as possible during slow periods. You can always invest in goods and services to improve your business during months of higher cash flow.
Create an Emergency Fund
No business is immune to costly and unexpected events like the breakdown of vital equipment or the loss of inventory due to flood, fire, or theft. While you might be tempted to spend all extra cash on variable expenses, it’s important to set some aside for the inevitable future emergency. Having the funds available to cover the unplanned expense is more convenient and less costly than having to apply for an emergency business loan.
Prepare a Profit and Loss Statement
To create this statement, subtract your expenses from your income for the month, quarter, or year to determine whether you made a profit or posted a loss. It’s common for new businesses to operate at a loss for a while, so don’t feel discouraged if that’s what your profit and loss statement shows. You can use the data to help you improve the next recording period.
Prepare Your Business Budget
The purpose of going through the above steps is to gather the information you need to make your best guess about the financial future of your business. This allows you to plan for slow and busy periods, hire help, purchase new equipment, and much more. Finding trends in your financial statements is essential to create an accurate business budget.
Small business budgeting is just one of the services we offer at Nolan Accounting. Contact us today to learn more about how we can help your business in Southeastern Wisconsin meet and exceed its financial goals.