How To Create a Budget for Your Small Business in 10 Steps — A budget is your plan of action, that shows you how much money you have coming in, and how much money you need to cover all your expenses, including all the cost of running your small business. Creating an annual budget will ensure that you know exactly where your finances stand at all times, giving you peace of mind so that you can relax and focus on the important things–like making your business succeed! Follow these 10 steps to create a budget for your small business in no time at all.
Step 1 – The Definition of Budget
A budget is an estimate of how much money you think you’ll spend over a set period of time. In business, that set period of time is typically one year. And while budgets are useful and necessary, they have their limitations. You should always know where your revenue comes from, and what your expenses look like, to understand what’s coming in and going out.
Step 2 – Know Where Your Money Is Going in your Annual Budget
Start by recording how much you spend each month on everything from rent to cable. At a minimum, it’s good to track your essential expenses (utilities, rent/mortgage, transportation and insurance), but it’s important to note that small things like groceries and eating out can add up quickly. Tracking all of these expenses will give you a good idea of where your money is going, which will help you determine how much cash flow you have left over.
Step 3 – Review Expenses In Your Annual Budget
Review your most recent bank statement to see what you’re currently spending your money on. Make sure to account for everything, including transportation costs, entertainment and supplies. Now it’s time to break down each of these expenses into its own category. Create an expense list with three columns: fixed expenses (those that don’t change much from month to month), variable expenses (those that fluctuate) and miscellaneous expenses (those that are one-time only). Here is an example: Step 3 – Set Your Income: Next, set your income. This should be easy if you already have a job simply look at last year’s tax return and add 5% to account for inflation.
Step 4 – Try the 50/30/20 Method in your Annual Budget
The 50/30/20 budgeting technique is easy to understand and even easier to use. In fact, it’s one of our favorite budgeting methods and we recommend it to almost every client who comes through our doors. Here’s how it works: Spend 50 percent of your money on needs (essentials like rent, utilities, groceries and insurance). Spend 30 percent on wants (dining out, entertainment and travel). And save 20 percent for emergencies.
Step 5 – Add a Balance Sheet in your Annual Budget
To create an annual budget, you need to know how much money your small business has available at any given point. A balance sheet offers insight into what your company owns and owes. You can calculate a balance sheet by adding up all of your assets (what you own) and subtracting all of your liabilities (what you owe). Assets include cash on hand, inventory, equipment, buildings or land owned by your company. Assets are listed on one side of a balance sheet while liabilities are listed on another side. You can also list off categories such as accounts receivable (money owed to you), accounts payable (money owed by you), current assets and current liabilities. If you have more than one type of asset or liability, they should be grouped together. The total value of your assets minus your liabilities is known as net worth. If you’re not sure how to get started with creating a balance sheet, there are many free templates online that will help guide you through it step-by-step.
Step 6 – Annual Budget Preparation
An annual budget is broken down into monthly expenses. By dividing your projected expenses by 12, you will know approximately how much money you need to contribute each month. Keep in mind that it’s likely your business income will fluctuate depending on sales and seasonality, but if you follow through with your monthly plan, you’ll have more than enough money to cover expenses at any given time of year.
Step 7 – Set Financial Goals in your Annual Budget
Before creating a budget, you need to set some financial goals. You can’t set your finances on autopilot unless you know where they’re headed. Be realistic with yourself don’t just plug random numbers into an Excel spreadsheet and call it good. Take time to think about what you want out of life financially. How much do you want to save? What kind of lifestyle do you want? Will that lifestyle cost more or less than what you’re making now? How much debt are you willing to take on? How much risk are you willing to take?
Step 8 – Make it Work for You and Not Against You in your Annual Budget
Before you even launch your business, make sure that you have a good idea of how much money you will need to keep your business running smoothly. The general rule of thumb is to expect to invest around $1,000 per month for every employee you plan on hiring. If you are planning on working alone, then don’t forget to include all costs associated with your own salary! Once you know how much money you will need each month, it’s time to create an annual budget. This should outline all monthly expenses and give a clear picture of how much cash flow will be needed over the course of one year.
Step 9 – Be Realistic About It in your Annual Budget
Don’t overestimate your ability to save money by cutting back, and don’t underestimate your ability to spend money because you think you can afford it. Instead, create an annual budget that is realistic and includes all of your expected expenses.
Step 10 – Cut Down Costs on Everything Else First Before Cutting People From the Team in your Annual Budget
It’s tempting to think you can save money by cutting staff and salaries, but it’s actually not where you’ll find your best savings. The truth is that most costs are fixed. Once you pay for utilities and rent (which don’t really have to do with running your business), every dollar you take from payroll is one less dollar of revenue your business brings in, as well as one less customer service person or salesperson who can help generate that revenue. Instead, look at other areas first: supplies, equipment, software licenses anything you can cut back on without affecting your ability to get work done. If you still need more savings after that and if taking away an employee’s salary will seriously affect productivity it might be time to start thinking about letting someone go.