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How to Create a Business Budget

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How to Create a business budget

How to Create a Business Budget

How to Create a business budget
How to Create a business budget

In an age where is so much information out there, you might follow a template for a business budget and find yourself overbudgeting for your business. This post is made especially for you to learn how to create a business budget to avoid drawbacks and unforeseen occurrences.

The talk of the challenges is most times enough to scare some people away from starting a business in the first place. According to a study, most of all small business owners don’t have a business budget in place. But creating a business budget is not a very difficult thing to do. There are free business budget samples, business budget templates, or even free business budget software you can use to help you create your business budget. In this post today, we are going to see how to create a business budget and why you should create one.

Some small businesses think that a business budget is not very important for their businesses so they neglect it most times, but if you want to be successful then you need to have one in place to help you in all your business processes.

How to Create a Business Budget for your Small Business

Budgeting for your business is all about making a calculated guess on how the future is going to be for your business and how the finances are going to look. This will require you to take a look back at what happened last month in your business, what happened last 3-4 months, and what happened last year by this month. After that, all you have to do is to use the information you got from looking back to make accurate predictions on how the future of the finances in your business is going to look like and then tailor the budget to fit what your business will need.

You don’t need to have everything clearly shown to you before you run a business, but studying your past progress will help you create a good business budget that will help you run your business smoothly.

Why your Business needs a Budget

When launching a business, creating a business budget is one of the things that can be forgotten and thrown away easily. It will look less important to create a business budget if your business is going through a boom or experiencing great profit.

But then you have to know that a budget can help you sustain your business’s future – long-term success of the business. Having a budget will help you look into the future of the business. You will look from next week, the next 3-4 months, and even a year ahead.

The most important thing a budget can help you to do is:

  • Help you control your business
  • Providing a future window
  • Predicting a slow business period to help you stay out of debt.
  • Showing you what it takes to be profitable
  • Making your business efficient

Not only will you enjoy the benefits above, but creating a business budget will make the running of your business easier and smooth. It will ensure that you are sending money only to the right places and not just blindly. I will help you stay out of debt.

6-steps to Create an Efficient Business Budget

As you start, you start the budgeting process by looking backward from where the business started and coming to the current moment to have an idea of what will do. The longer you have been in the business, the easier it is for you to prepare your business budget.

You might have to go on extensive research to know the prices of things in your kind of business to be able to create a good business budget. You can rely on a business budget template business budget software to guide you as you prepare your budget. Some business owner prepares their business budget in excel.

1. Study your Business Revenue

The first step to creating a workable budget is to look back at your business revenue or income in the past, Add all the income together and take an average of how much comes into your business every month.

When you calculate the business income, consider the revenue and not the profit. Business revenue is defined as the money that comes into the business before expenses are deducted.

When you have identified all your income streams then calculate your business monthly income. Note that it is important to do this for many months – 12 if you have enough up to that data.

With 12 months of data available you should be able to calculate how your monthly income changes over time and look for seasons where they form a pattern. Your business can experience low sales during the holidays and high sales during when schools resume. By taking a look at the patterns you prepare for the lean days and take the right financial decision.

2. Subtract Recurrent Cost

Recurrent costs are also called fixed costs and subtracting them is the second step to creating a good business budget. They apply to recurring cost that is necessary for your business operates.

Fixed costs may occur daily, weekly, monthly, or even yearly. So you make sure that you get enough data as you can about your recurring costs so you can make a good budget. Recurring costs in your business can be electricity bills payment, payroll payments, and insurance among other things.

3. Determine your Variable Cost

Just as the name implies variables costs that change from time to time depending on the services you use for your business. These services are necessary for your business to keep operating such as utilities.

You might find some expenses in this category that will find that is not necessary for the running of your business but it is okay to have them like education or some extra things that will increase your profitability. Such costs are discretionary expenses that you can include in your variable costs.

So during lean months, you need to lower your variable costs to meet up for more of the things that your business that will need to operate.

4. Set aside Contingency funds in case of an emergency

Whether it is in business or not, we have all faced one-time costs that are not at all convenient. These costs come up when you least expect them to happen and they come usually when the budget is tight. To avoid such cases and the fear of them happening, when preparing your business budget make sure you have cash handy set aside for such cases.

Sometimes you will be tempted to spend all the surplus money set aside for variable costs, it will be better to put them in the emergency funds. By this, you can have funds handy anytime a piece of equipment breaks down and you need to fix it or change it completely.

5. Create a Profit and Loss Profile

When you have collected all the information stated above then it will be time to create your profit and loss profile or P&L.

Just talking about profit and loss can send you into anxiety mode but remember you have done much of the work. It is only about addition and subtraction. Add up all the income for the month and the expenses for the month then subtract the expenses from the income and hope that you fall into the positive number region.

if you do fall into the positive region then it is a profit! if not then it is a loss and that is okay in business. Sometimes your profit, and other times you lose but make sure you examine what happened during the last month and see where the mistake is, and correct it.

6. Outline your Forward-looking Business Budget

Whether you are new in business or you have been around for some time now, projecting what will possibly happen in the future of your business is educated guesswork. If you have been in business for some time your accuracy for guessing will increase which you will be guessing accurately.

Now that you have your P&L it is time to start creating your budget. This is a future-focused business document.

For this step, referring to your P&L will help to better understand the seasonal changes in your business, which investment mistake you have made, and which one you should repeat again.

On your P&L look for:

  • Big supply or equipment purchases which created a beneficial loss.
  • Trends due to changes in weather, natural disasters, or economic downturn.
  • Trends due to school calendars, tourist travel patterns, or supply constraints.
  • The profit that is higher than in previous years or can’t be explained.

When you refer to your P&L you are looking for ways to avoid the fluctuations and changes in your business.

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