Strategically managing your budget is one of the essential skills you can have as a business owner. Without it, cash flow problems will quickly start knocking on your door, and your business can lose its direction and stability. Every tool that can help you stay away from this scenario should be a welcome addition to your strategy.
This is where a business budget comes in. It’s not the most exciting task, but once complete, it kills two birds with one stone; controlling your spending becomes easier to manage, and you have a more detailed view of the financial health of your business.
This article will cover how budgeting can help your business, and what steps you should take when making a template of your own.
Benefits of business budgets
Cash flow overview
Often having to wear many hats, business owners can gradually lose focus of where money is coming from and where it’s going.
Once you have a budget template in front of you, you can carefully examine your income sources and discover how your individual products or services are performing. Is there anything that is not delivering? Perhaps you need to rework the product and try a new approach to promoting it or end it altogether.
Likewise, tallying up your expenses can bring a new perspective on exactly just how much you’re spending, and help you discover opportunities to cut back. Are there any categories that are taking up disproportionate amounts of finance, but are not essential to your business? Work on those items to be more cost-effective in the future.
Deciding on sales targets
By tallying up your expenses, you’ll also understand what is the threshold you need to reach in order to break even. Such information can help you determine the health of your business and—if necessary—gives you time to take measures like acquiring a short-term loan.
Applying for finance
Speaking of loans, a budget is one of the documents that lenders might ask you to provide in order to assess your business. Having this document integrated with your basic financial practices can significantly ease the approval process and increase the amount you are eligible for.
How to make a business budget
So now that we’ve covered some of the benefits of this process, how exactly should you go about creating a business budget? Here are four simple steps to follow.
Step one: Tally up your expenses.
Expenses can fall into two categories - fixed and variable. Fixed expenses are costs that stay the same each month and are therefore easy to predict, like rent and payroll—basics that you need to stay operational. Variable expenses are costs that are trickier to predict for longer than a month or two in advance since they depend on factors like the number of customer orders you need to fulfil. For example, raw materials or inventory can be classed as a variable expense.
Step two: Set income targets.
After calculating your expenses and cutting back anything unnecessary, you’ll be able to see how much income you need in order to break even and make a profit. If your targets are difficult to achieve, it’s time to think of solutions that would either cut costs back or generate more revenue.
Step three: Estimate numbers for the next quarter.
Predictions are never an exact science, but there are ways to look at the numbers you’ve gathered from past months and create a forecast.
The best advice for any business is to underestimate your income and overestimate your expenses, especially if you’re new to budgeting. In terms of income, sales forecasting can prove helpful, and doesn’t have to be complicated (or expensive). There are various approaches you can take, with free templates available online.
Step four: Keep track of differences.
After a few months, you can compare your predictions to your actual numbers, and make adjustments. Within your budget sheet, keep one final row where you can track these differences. Regardless of whether the discrepancies are positive or negative, keep a sharp eye and ask yourself why they happened.
You could discover a potential problem at an early stage. Perhaps you’re overspending in a certain category, or a source of income isn’t delivering as much as before.
Alternatively, you might be able to identify that you’re earning more money from a specific category due to a rise in customer interest. If this increase keeps happening month by month, it could be time to consider what you need to do to keep up with demand.
Overall, a business budget might take time and effort to complete, but once you have it, you can make more well-informed decisions that will give you a strategic advantage.
Vasilena Stamboliyska is an author at Spotcap Australia. Her aim is to provide small businesses with insightful guides on a variety of financial topics to help them make the most of every opportunity.