Budgeting is a misunderstood practice. The word “budget” often elicits feelings of financial restriction, but we’re here to show you how it can evoke fiscal freedom. Planning for how you’ll make money and spend money empowers you to make better business decisions. Without a budget, you’re just throwing cash at your business strategy like a blindfolded game of darts.
A budget is the roadmap to your business’s success. It shows month-to-month, quarter-to-quarter, and year-to-year how you’re going to get from Point A to Point B. It’s simple: a budget explains how much money you have, how much you need to spend, and what you need to make to reach and exceed your goals.
Drafting your first small business budget isn’t easy. Creating your second and third budget becomes much more straightforward because you have previous projections and actuals to base your estimates on—but the first one is tricky. If you’ve never created a budget for your business before, then read on to learn the step-by-step process.
1. Estimate Your Revenue
The first step in creating a budget is to add up all of your income sources. How much money in sales do you think you’ll make? Remember, this is revenue, not profit, so don’t take into account your expenses just yet—we’ll get there.
Calculating your revenue is simple. Take the number of products you estimate selling and multiply that by the price of the product (X number of products * price of product). If you sell multiple products, create separate revenue estimates for each item. Use your old sales records and financial statements to help—if you have a bookkeeping tool, like Sunrise, to track all your expenses, this process is easy-peasy.
Don’t forget to include the money you’ll make from royalties, interest, equity, and investments in your revenue.
2. Predict Your Expenses
When budgeting for your expenses, you’ll want to allocate funds to a few specific categories: fixed costs, variable costs, and one-time costs.
- Fixed costs are the charges you pay every month for the same price. Think of rent, software subscriptions, loan payments, insurance premiums, payroll, and other expenses you pay every month. Check your business’s transactions over the last few months to identify any additional fixed costs.
- Variable costs are the expenses that fluctuate month-to-month. Your “costs of goods sold” would be included here—more sales will result in higher variable costs. You’d also want to enter sales commissions, marketing costs, utilities, supplies, and costs to replace old equipment.
- One-off costs are unique, infrequent expenses. For example, if you predict having to relocate your office, purchase new software, or outfit a team with new hardware, these would be one-off costs. Though they’re often less predictable, do your best to predict your one-time costs to avoid unbalancing your budget with surprise line items.
3. Calculate Your Profit
Subtract your estimated expenses from your predicted revenue to calculate your profit—this number is the money your business is actually making. If you crunch the numbers and find your expenses exceed your revenue, that’s a loss—but don’t panic! Small businesses don’t turn a profit every year, and it’s incredibly difficult in the early days.
If you’re satisfied with your profit or loss, skip to step 5. If you’re unhappy with it, continue to step 4.
4. Adjust Your Numbers
Your revenue and expense estimates aren’t set in stone. If you’re not happy with your predicted profit or loss, rework the numbers. Could you cut costs by reducing overhead? Would you be able to bump up your revenue by hiring someone to help with sales or marketing?
Remember, a loss isn’t the end of the world. Would it be better to mitigate your losses to make a profit for the year or accelerate your business’s growth by investing in your business? There’s no right answer. As the business owner, that decision is ultimately up to you—and you start making that decision when creating your first budget.
5. Revisit Your Budget Often
Budgeting isn’t a one-and-done activity you do 4 times throughout the year. You should reference your budget often and make adjustments as circumstances change.
For example, if an essential piece of equipment breaks down and slows production, you’re going to need to take into account the dip in revenue plus the repair costs. Your current budget is now irrelevant—revisit the plan and adjust the numbers to make them work for your new situation. With a budget in hand, you’ll already know where all your money is coming and going, so you’ll be in a better position to reallocate the funds without damaging your business.
Never Stop Budgeting
And there you have it—the 5-step process for creating your first small business budget. Make budgeting a part of your ongoing business strategy to keep a constant hold on the financial reins to your business. Remember, the number one way to stick to your budget is to start one. A second-rate budget today is worth much more than a flawless budget next year—so get started now, even if it’s not perfect.