Creating a Small Business Budget
Often, the key to making money, is knowing how to spend it.
Knowing how much revenue is needed to keep your business afloat, or even better, growing is vital information. If you want your small business to be successful, you will need to create and maintain a business budget.
It's A Necessity - No Really
Budgeting is necessary to make educated financial decisions. You must have a grasp on where your money went last week, last month, even last year. Additionally, where is your money coming from? How much revenue can you feasibly make in the next year?
Once you get the hang of it, your budget will also help you to forecast for the upcoming months. Do you know a slow period is up ahead? This gives you time to minimize expenses before money gets tight.
As you update your budget with actual costs incurred, and income made thus far, it will be easy to see if you are on target for year end. If you're not, seeing it laid out in a clear way will make troubleshooting and brainstorming solutions much easier.
Getting Started
Our goal is to make this process as painless as possible. The first budget is always the hardest, once the leg work is done, they will come together easily in the future.
Every budget starts by looking backwards. We need to breakdown your business's previous months, even years, in business to get accurate financial data. The most successful budgets are precise. You will find this data in your businesses financial statements such as, Balance Sheet, Income Statement (Profit & Loss), and Trial Balance.
Many small businesses create an annual budget. This should be broken down monthly. You may also find it helpful to leave an empty column next to each month to fill in your actual totals once the month has ended. This will allow you to see if you are on target to meet your financial goals, or prepared for the upcoming slow period.
What You Need
Revenue
The first step is to identify all of your sources of income. How much does each income stream contribute to your bottom line monthly? Calculate this figure for at least the last 12 months, even if you've been in business for many years, doing the previous couple years would be beneficial.
Now that you have the amount of money your business makes each month in front of you, it is much easier to identify any patterns. Perhaps you experience an influx of sales in November and December in anticipation for the holidays, but then things taper off significantly in the new year. Knowing this, with the numbers to back it up, can ensure your business is prepared with a financial cushion.
Fixed Costs
Your business's fixed costs are those that remain the same, no matter how many sales you're making. For example, your monthly rent, Internet bill, or insurance. These expenses are typically easy to identify and hard to alter.
Variable Costs
Variable costs fluctuate depending on how much you use it or how many sales you're making. For example, utilities, inventory, wages, and office supplies. These expenses may be harder to forecast for with an exact figure but are the easiest to reduce in times of need.
Drafting Your Budget
Start by developing a sales forecast and a profit target. What is a realistic estimate for sales revenue in the coming year? The reason we're starting here, is because this figure will drive the estimates for upcoming costs.
Next, looking at the operating expenses and cost of goods sold (COGS) you incurred this year, which can be found on your Income Statement, and use those to calculate your gross profit margin. The gross profit margin shows you how much of every dollar of revenue is left after paying COGS. It is calculated by subtracting COGS from your total revenue, then dividing that number by total revenue.
Now that you have all the numbers in front of you, you will likely have to get creative on how to achieve your target profit by the end of the year. Will you have to purchase fewer supplies at the beginning of the year? Or hire another employee? With each change you make, go back and readjust the numbers. It's important to remember that your budget is just a guide to keep you heading in the right direction, not an exact science. Adjustments throughout the year will keep you on track. Perhaps the economy will take a hit, driving down sales, or conversely, you land a huge client and revenue doubles. Be sure to include the changes to expenses as well when these occur.
If you're having trouble interpreting your numbers to achieve your businesses financial goals, it may be time to bring in the professionals. The experts at Triple Play would love to help!
Knowing how much revenue is needed to keep your business afloat, or even better, growing is vital information. If you want your small business to be successful, you will need to create and maintain a business budget.
It's A Necessity - No Really
Budgeting is necessary to make educated financial decisions. You must have a grasp on where your money went last week, last month, even last year. Additionally, where is your money coming from? How much revenue can you feasibly make in the next year?
Once you get the hang of it, your budget will also help you to forecast for the upcoming months. Do you know a slow period is up ahead? This gives you time to minimize expenses before money gets tight.
As you update your budget with actual costs incurred, and income made thus far, it will be easy to see if you are on target for year end. If you're not, seeing it laid out in a clear way will make troubleshooting and brainstorming solutions much easier.
Getting Started
Our goal is to make this process as painless as possible. The first budget is always the hardest, once the leg work is done, they will come together easily in the future.
Every budget starts by looking backwards. We need to breakdown your business's previous months, even years, in business to get accurate financial data. The most successful budgets are precise. You will find this data in your businesses financial statements such as, Balance Sheet, Income Statement (Profit & Loss), and Trial Balance.
Many small businesses create an annual budget. This should be broken down monthly. You may also find it helpful to leave an empty column next to each month to fill in your actual totals once the month has ended. This will allow you to see if you are on target to meet your financial goals, or prepared for the upcoming slow period.
What You Need
Revenue
The first step is to identify all of your sources of income. How much does each income stream contribute to your bottom line monthly? Calculate this figure for at least the last 12 months, even if you've been in business for many years, doing the previous couple years would be beneficial.
Now that you have the amount of money your business makes each month in front of you, it is much easier to identify any patterns. Perhaps you experience an influx of sales in November and December in anticipation for the holidays, but then things taper off significantly in the new year. Knowing this, with the numbers to back it up, can ensure your business is prepared with a financial cushion.
Fixed Costs
Your business's fixed costs are those that remain the same, no matter how many sales you're making. For example, your monthly rent, Internet bill, or insurance. These expenses are typically easy to identify and hard to alter.
Variable Costs
Variable costs fluctuate depending on how much you use it or how many sales you're making. For example, utilities, inventory, wages, and office supplies. These expenses may be harder to forecast for with an exact figure but are the easiest to reduce in times of need.
Drafting Your Budget
Start by developing a sales forecast and a profit target. What is a realistic estimate for sales revenue in the coming year? The reason we're starting here, is because this figure will drive the estimates for upcoming costs.
Next, looking at the operating expenses and cost of goods sold (COGS) you incurred this year, which can be found on your Income Statement, and use those to calculate your gross profit margin. The gross profit margin shows you how much of every dollar of revenue is left after paying COGS. It is calculated by subtracting COGS from your total revenue, then dividing that number by total revenue.
Now that you have all the numbers in front of you, you will likely have to get creative on how to achieve your target profit by the end of the year. Will you have to purchase fewer supplies at the beginning of the year? Or hire another employee? With each change you make, go back and readjust the numbers. It's important to remember that your budget is just a guide to keep you heading in the right direction, not an exact science. Adjustments throughout the year will keep you on track. Perhaps the economy will take a hit, driving down sales, or conversely, you land a huge client and revenue doubles. Be sure to include the changes to expenses as well when these occur.
If you're having trouble interpreting your numbers to achieve your businesses financial goals, it may be time to bring in the professionals. The experts at Triple Play would love to help!
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