How To Create A Small Business Budget

Every commercial entity aims to generate profitable results and carve a niche in the cluttered market. However, small businesses have limited employees and infrastructure constraints that reduce efficiency. They need to use their capital sensibly to increase sales while maintaining a positive bottom line. It requires budgeting effectively to invest wisely and gain the maximum returns.

Since budgeting requires financial literacy and forecasting cash flow, hiring a professional accountant is recommended. However, entrepreneurs often avoid this expense and use their expertise to do the task. So, here are the steps for creating a small business budget without professional help. It will help you allocate funds to each department accurately and reduce unnecessary expenses.

1. Determine The Expected Revenue

Entrepreneurs need to assess the past income records of their small businesses to identify their incomings. It involves understanding how much income the business generated monthly for the past few years. It will help to figure out the months when the sales were high and those when the sales dipped.

The trends help understand the seasonal patterns and forecast the expected revenue in the upcoming months, quarters and years. It is vital to understand that revenue is the total income before subtracting expenses. It is an important component of the budget and helps to get funding and sell business online in future.

2. Identify Your Fixed Expenses

Every business has ongoing fixed costs, such as monthly rent, utilities, insurance premiums, salaries and wages of employees, debt payments, legal fees, etc. Entrepreneurs must add all these costs to know about the expenses of the entity every month. The entrepreneur can reduce these recurring costs to improve the cash flow.

For example, entrepreneurs can relocate to a smaller office with cheaper rent or sub-lease the extra space to another small business. Similarly, they can opt for refinancing with a lower interest rate.

3. Consider the Variable Expenses

The variable costs are those expenses that are not fixed and keep changing. They depend on the production capacity and inventory supply required in the particular period. Months experiencing high demand will incur higher costs, while those with low demand will incur minimal expenses.

Entrepreneurs need to calculate these variable costs for the future and subtract them from the revenue to determine the profits. It is vital to have this information when you plan to sell business online because buyers thoroughly check finances to understand the profitability.

4. Make Room For Unexpected Costs

Besides the fixed and variable costs, certain unexpected expenses can catch the entrepreneur off-guard. Most large businesses build emergency funds for such scenarios to continue operating even with negligible sales. Thus, small businesses should prepare cash reserves for unforeseen costs and build a strong sales team.

If the business does not have this fund, it will not be able to stay afloat in dry spells or losses due to damaged stock or a pandemic. Thus, the budget must have an amount set aside for the emergency fund every month.

5. Evaluate the Gross Profit Margin

The gross profit margin is calculated by subtracting all the expenses from the income in a given period. It helps the entrepreneurs understand the financial health of their businesses. Most business buyers check this margin when entrepreneurs decide to sell their business online.

It is essential to compare the profits of all the previous years to predict the profit margins for the future. It helps to set realistic sales goals for each quarter and use the figures in the preparation of the budget.

6. Calculate the Cash Flow

Cash flow forecasting involves assessing the inflow and outflow of cash in the business during a specific period. It is prepared by estimating cash inflow and outflow for the future and determining the net cash flow. The forecasting can be done weekly, quarterly or annually.

It is an essential part of budget preparation because it helps the entrepreneur check if the business will be able to pay its bills on time or not. It is also helpful in identifying low cash inflow periods in future and making changes in the operations to avoid financial distress. Cash flow is another metric analysed by business buyers when entrepreneurs sell businesses online. 

7. Collate All the Data for the Budget

Before preparing the budget, the entrepreneur has to set the financial goals for the next quarter and financial year. It will help you ascertain how to spend money and which areas must be prioritised. The budget must be created to achieve the goals without overspending.

Budgeting for the business requires collecting all the financial data mentioned in the steps above. If the expenses seem too high, the entrepreneur can implement cost-cutting measures to reduce them. The next step is subtracting the expenses from the revenue to determine the amount left with the business.

Wrapping Up

Budgeting can be managed efficiently with the help of accounting software. These tools help in making accurate predictions and calculations. However, if you are doing it on your own, follow the steps mentioned above. It must be flexible enough to make changes in case of deviations from estimated figures.