Do you wish to know the exact steps you need to take to make a business budget? Perhaps you’re having trouble creating an effective budget for your business?
If any of these describes you’re situation, know that you’re not alone.
Budgeting is one of the most relevant skills needed to effectively manage a business.
Yet, many business owners lack this skill, especially new business owners.
Hence, they struggle with budgeting problems in business.
Fortunately, you can learn the right way to make an accurate business budget and save yourself many budgeting hassles from this blog post.
Read on to find out all you need to know.
Budgeting In Business; How To Make A Business Budget
A business budget is simply an outline of how you plan to spend your business finances.
Essentially, it is a plan that covers how you intend to spend money in your business based on your revenue and expenses.
It’s hard to find any operating business without a business budget.
This is because it is a vital business process that could make or mar a business depending on how it is handled.
So, let’s consider why learning how to make a business budget is important in business.
Benefits Of Good Budgeting In Business
Helps You Manage Your Business Finances Effectively
Budgeting helps you avoid the trap of overspending and incurring debts in business.
Making a business budget reveals your actual financial capacity.
This way, you can accurately predict your expenditure, know when you’ve surpassed your spending limits, and make appropriate adjustments.
Far too many businesses suffer heavy financial strain due to mismanagement of funds.
However, with budgeting, you can avoid this pitfall.
Helps You Make Better Financial Decisions
It is also important because it helps you make better financial decisions in your business.
After tracking your expenses, you can make better financial projections that will benefit your business.
For instance, you can tell if the business has enough money to push into other sensitive areas that can yield more increases in your business.
Improves Productivity And Efficiency
Managing your business finances will ensure that you have enough financial resources to keep up with business operations.
Hence, you’ll be able to execute important business projects, leading to productivity and efficiency.
Helps You Make Important Financial Projections
It also helps you know whether your business will be running at a profit or loss, drawing from your calculations.
Particularly, if your expenditure exceeds your revenue, you can tell that your business’s financial future isn’t looking great.
With that, you decide the next steps to take.
It Helps You To Track Business Performance
It could also help you maintain accurate financial records for measuring business performance.
Overall, it could give you insight into your actual expenditure, budgeted expenditure, and which of your activities are yielding huge ROI, thereby showing you areas you need to improve.
Helps You Spot Financial Loopholes And Avoid Financial Difficulties
It could also help you point out overspending, cashflow issues, and other related financial problems.
As a result, you could quickly make efforts to address them before they ruin your business.
So, these are some of the main reasons why budgeting is important in business.
Now, we’ll be considering the different types of budgets to give you more insight into how to make a business budget.
Types Of Business Budget
One business budget may differ from the other because industries differ.
More so, one business owner’s goals may differ from the other.
Due to this, budgets tend to differ from business to business.
Nonetheless, there are some major business budgets that every business owner should have.
This is a financial plan for the business’s overall activities.
It usually projects the business’ expected expenditure for a whole fiscal year.
This covers primarily the financial plans of the business.
It is the business’s projected income and expenditure over a short and long-term basis.
This captures the projected expenditure for business operations over a period of time.
It addresses areas like income, fixed, and variable costs, giving you insight into how much you need to run your business.
This captures an estimated income inflow and outflow in the business over a period of time.
This covers all expected expenditures on marketing campaigns such as paid ads, content marketing, hiring marketing team/professionals, marketing automation software, etc., over a period of time.
Labour Cost Budget
This has to do with the projected cost of hiring a workforce/team and other staffing-related expenses.
Now you have an idea of the different types of budgets you could create should create for your business.
It’s also important that you have an idea of what to include in your budget when making one for your business.
Components Of A Budget; What To Include In Your Business Budget
This is the amount of money you expect to make in the business from your business activities within a specific period of time.
It is usually determined by predicting sales and the cost of your goods/services.
Many business owners most times over-estimate their projected income.
This could lead to inaccurate projections of your business’s financial future.
Hence, be careful not to overestimate your projected income.
These are constant expenditures in business, such as rent, utilities, office supplies, payroll, etc.
Including these in your budget can help you ascertain if you have enough finances to cover these expenses.
This has to do with business expenditures that are not constant.
Ideally, this expenditure could increase or decrease based on a number of factors like;
- Increased production activities in the business
- Increased sales
- Also, inflation in the price of production materials
It’s also a smart business move to set aside some money for emergencies in business.
These are usually referred to as contingency funds.
Unplanned scenarios come up in business, such as an office piece of equipment going bad, among other things.
Setting aside a certain amount for situations like these will help you handle these emergencies with ease.
This is a financial projection of the inflow and outflow of money in your business and the timing of the cash flow.
Cash flow is such an important aspect of every business.
It’s what determines if you can keep up with business operations.
Hence, getting a clear sense of your projected cash flow will help you make better financial decisions in business.
You can make your cash flow projections based on previous financial records in your business.
If yours is a fairly new business with no financial records yet, you can look at the charts of other similar businesses in your industry.
Now, here’s the good part; forecasting your business profitability.
This part of a business budget captures how much money you ought to be left with after subtracting your projected expenditure from your revenue.
Whatever you have left from this process will be your expected profit for the month/year.
As you grow in business and continue to go through this process, your expected profit should differ positively from the previous financial projections.
When this is the case, it shows that your business is growing.
How To Make A Business Budget
1. Calculate Your Total Revenue
The first step to successful budgeting is having accurate details of your revenue/income.
Your business revenue is the total amount of money that comes into the business from the sales of products/services and other business processes before expenses are deducted.
Depending on your business model, you may have different revenue sources.
So, at this stage, you should collect information on the income you get from these different sources monthly and over a period of time.
For instance, say your business sells a different range of products to its customers.
Your total revenue (TR) will be the sales price (per unit) multiplied by the number of sales.
Then, combine the total for each product to arrive at your total revenue.
Above all, this process is supposed to give you a clear idea of how much money your business generates monthly/annually.
2. Project Your Fixed Costs; How To Make A Business Budget
The next step is to forecast your expected expenses (fixed costs).
As we stated earlier, fixed costs are those ongoing expenses you incur in business.
To put it simply, regardless of what happens, you always have to pay for these expenses, e.g., paying for utilities, rent, taxes, etc.
You can always refer back to your financial statements or excel records to track your recurring fixed costs.
Once you’ve identified your fixed expenses over a period of time (monthly/annually), collate the price or expenses on each item, and add them up altogether.
The total amount will give you your fixed costs.
Suppose you’re a new business owner without any previous business records to refer to.
In that case, you could make projections based on current expenses or from insights gathered from other businesses in your industry.
3. Capture The Variable Costs
Variable costs are those business expenses that differ based on your business activities or performance.
They mostly cover aspects like; production costs, labor costs, sales costs, etc.
The prices of items under this category fluctuate depending on an increase or decrease in your business activities.
For instance, production costs will go up if sales go up because the higher the demand for your products, the more of them you have to make.
Conversely, if there’s a decrease in sales, production will be slower.
Hence, there’ll be a decrease in your production cost.
It’s important to capture this information accurately in your budget so that you can make more informed decisions.
Overall, as your business profits increase, you could expand your variable cost budget to grow your business quickly.
For instance, you could increase your budgeted variable costs to cover marketing costs that could improve sales in your business.
4. Make Room For Unexpected Expenditure
We pointed out earlier that setting aside contingency funds for unplanned expenditures can save you some financial stress in your business.
Precisely, it will prevent scenarios where you have to take finances from other aspects of the business to cater to these emergencies.
So, analyze your business environment to identify the worst-case scenarios that can happen, such as a piece of office equipment going bad, theft, etc.
Then, set aside specific funds to cover these expenses when they come up.
5. Collate The Information And Compare It With Your Records
Now, this is the most important and sensitive part of making a business budget.
This is where the forecasting begins.
It’s time to capture all the information you’ve gathered above to know your financial strength.
Calculate your total revenue and expenditure, whatever the figures represent, and compare it to your cash flow.
If your expenditure exceeds your cash inflow, it means you’ll have to adjust your budget.
Otherwise, you’ll be running your business at a loss.
Above all, this step of creating a business budget will help you determine your business profitability for the month/year, depending on how long you’re budgeting for.
6. Make The Best Financial Decision For Your Business Drawing From Your Budgeting Insight
By this stage, you should have a clear projection of your business’s financial status and profitability.
You should decide on the next steps forward.
Do you need to cut some things off your budget to ensure that you don’t run at a loss?
Review the numbers and decide.
Now, you know how to make a business budget.
There are also certain things you could do to improve your budgeting skills.
Recommended Budgeting Principles To Adopt For Business Success
Be Cautious & Conservative With Your Business Resources
As much as optimism is a huge part of business success, over-optimism could be bad for you, especially when making financial projections.
It’s wise to project unexpected turn of events and create a sort of financial cushion for your business.
A good strategy to employ here is to be conservative with your business funds so you can have enough to spare for emergencies.
Even when the profits keep coming in massively as expected, it’s best to conserve some for the rainy days.
Also, underestimate your revenue and overestimate your expenditure.
This way, you’ll have extra to cater to certain unforeseen circumstances.
Find Ways To Cut Business Costs
Another budgeting principle that could improve your business budget and enhance profitability is finding ways to minimize your expenses.
This way, you’d have enough to push into other aspects of the business that could yield massive results.
So, identify several budget-friendly options that you can adopt in your business processes.
For instances, you could negotiate the price of goods from your vendors/suppliers, since you’re buying in bulk.
Keep Accurate Records
Discrepancies in your financial records can lead to inaccurate financial projections.
This could also lead you to make wrong financial decisions in your business.
So, use accurate record-keeping tools to track your financial records, such as excel spreadsheets.
Alternatively, you could hire an accountant to help you keep accurate financial records.
Review Your Budget Periodically
Finally, you also need to review your budget periodically.
This is the only way you can track your business performance and get valuable insight that will help you make better financial decisions.
Final Thoughts On How To Make A Business Budget
There you have it; the steps you need to take to make a business budget.
We’ve also shared some helpful tips to help you stay on top of your business finances.
Keep these tips in mind to make accurate financial projections to help you make the right financial decisions.