How to Create a Business Budget: 5 Simple Steps

Real Money Talk

A business budget is like a map for your company — it helps you navigate and find your way if you get lost. If you have yet to take a close look at where your dollars are going, it may be time to do so.

Not only important for your company growth, but a business budget allows you to identify what resources are readily available to you and whether your business is headed towards trouble. If you’re not sure how to create a business budget, we’re here to help with five steps that can steer you in the right direction.

To make a small business budget, you should first be aware of what components go into it: revenues, expenses, sales. Use these five steps as a guide to create your own business budget.   

1. Identify Your Goals

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What do you want your business to accomplish in the 12 to 14 months? Decide on a timeframe then break your budget down by month for you to update. Whether your goal is to increase annual sales by 12% or increase search engine traffic by 10%, make sure it’s realistic and achievable. Break each goal down into a tangible amount and distribute by month. Smart goals will serve as a starting point for your new budget and should be in line with your business plan and strategy.

2. Calculate Projections

If you’ve already been in business for some time, use previous year’s numbers and data as a starting point. If you expect growth, you can project revenues more easily, but you should always stay conservative. If your business earned $50K last year, it’s usually a safe assumption that you won’t reach $10 million in the next 12 months. Work a bit of slack into your business budget to help reduce risk, in case you don’t reach the sales goal you were aiming for.

On the flip side, if you’re a new business, establish a forecast revenue for your growth. Your budget is a great tool to compare your costs to your revenue projections.

3. Review Your Numbers

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Begin with your expenses, both fixed or variable. Fixed expenses do not change from month to month — such as your office rent, insurance, or utilities. Variable expenses do change — your marketing costs, product sales, or inventory — and the two types are equally important.

Work in your debts, liabilities, assets, expenditures, and cash flow. Talk with your team to make sure everyone is on the same page with costs. This due diligence will help reduce risk of any unexpected expense that may offset your success.

4. Gross Profit Margin Time

Gross profit margin is what revenue your company has left once expenses are paid. To calculate this amount, subtract your expenses from your total revenue. Your profit margin will change month to month, but it’s helpful to have a pulse on it. Your gross profit margin, over time, will indicate the financial health of your business, and what you have to either cut down on or spend.

5. Monitor and Update Your Budget Regularly  

Work backwards from your bottom line. Your business budget is a working document to track your performance. Make real-time adjustments along the way, whether it’s monthly, weekly, or even daily. With each of these steps, do what works best for your company.

Why Is a Business Budget Important?

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A business budget is the framework of your finances. It helps articulate the priorities of a business, when it comes to your vision, goals, and strategy, to get the entire team on the same page. With a consistent and measurable budget, you can better control your spending, track shortages in your cash flow, and address any issues ahead of time. A business budget is the best tool to plan for your future, make informed decisions, and improve your chances of having a healthy and long-lasting business.

Sources: Entrepreneur | Investopedia |  FDIC.gov | SBA.Gov

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