Budgeting effectively means knowing exactly how much income your business generates; Megan Goddard, head of finance at London-based interiors brand Plank Hardware, suggests keeping track of revenue sources every month in order to properly budget. As part of your profit calculations, it is necessary to first calculate fixed costs such as salaries, rent, and supplies before subtracting these expenses from your revenue to calculate your profit margins.
1. Know Your Financials
Budgeting is an indispensable way of setting and meeting measurable and attainable financial objectives. A budget helps you track what money comes in and goes out, providing valuable insight into future profits and growth potential. Use past revenue data to forecast future revenues of your business and accurately account for all incoming cash, such as sales proceeds, or expenses, such as rent.
Once you have calculated all your fixed costs (rent, mortgage, utilities, insurance premiums, banking fees, and accounting services), subtract this total from your projected revenues to determine how much each sale actually cost to make—your profit margin.
2. Set Financial Goals
Setting goals goes beyond making vague pledges; they provide the framework for creating concrete strategies and plans to realize your business vision. Begin by determining how much revenue your business expects to bring in over the year (revenue before expenses). This should provide a baseline for creating your budget.
Once you understand your current revenue sources and historical trends, you can use this knowledge to set realistic goals that will allow you to allocate income among different expense categories later.
3. Evaluate Your Current Expenses
Making a budget may be tedious and time-consuming, but it is absolutely essential. No matter if your business is profitable or not, knowing where your funds are being allocated allows you to make smart financial decisions now and into the future.
Your budget should include both fixed and variable costs, in addition to one-off expenses such as rent, mortgage payments, insurance premiums, and accounting services. Variable costs vary based on how your business operates, such as utility bills, advertising campaigns, or professional development activities. Your goal should be to balance expenses with revenue so as not to exceed it. This will enable you to invest in the growth of your business.
4. Create a Cash Flow Plan
Calculating how much money your business brings in each month and subtracting expenses to determine its profit is of vital importance for business success. Budgets must include all sources of revenue, as well as fixed costs such as rent, payroll, and taxes. They should also account for seasonal fluctuations and industry-related trends that might influence them.
Use past months’ numbers to make more responsible projections and spending decisions. Many bookkeeping systems and online accounting apps provide budget templates you can adapt to fit your specific needs; additionally, consider using Willow’s cash flow forecast tool to save time and simplify this process.
5. Set Up a Savings Account
A business budget is a financial plan designed to estimate expenses and predict revenue streams and to assist you in making informed business decisions that lead to success.
An effective business budget relies on historical sales data to make financially conservative projections that can help your company avoid unexpected costs that could send it into debt, save for future expenses, and manage cash flow more effectively. You can create one using tools like spreadsheets or small business accounting software; using such programs can make the process faster and more accurate.
6. Create a Budget for the Future
Your budget is an estimate of future revenue and expenses that helps set financial goals for your business and ensure there is enough money available to pay bills, meet goals, invest for growth, and invest in the future.
For instance, if your outdoor retail business experiences seasonal variations that cause revenue fluctuations to vary seasonally, using past data to forecast these fluctuations and plan ahead can help predict and plan for lean months and provide a safety net that allows your business to keep operating through them. Create a contingency fund to cover unexpected costs like equipment breakdown or sudden economic shifts, as this can prevent unexpectedly costly surprises from derailing your budget and business development.
7. Make a Plan to Pay Off Debt
An effective business budget is an indispensable tool for any small business, outlining key aspects of its financial status and helping make strategic decisions. A budget answers key questions about revenue needed to cover expenses and what costs need to be subtracted from sales in order to calculate profit and more.
Budgets make it easy to track one-time expenses like equipment purchases, consultant hires, or security breaches. A business budget template can make this process simpler by giving you a structure on which to build. It can save time as well.
8. Manage Your Cash Flow
When creating a budget, it’s crucial that you accurately account for all incoming revenues—this includes both ongoing expenses as well as one-off costs such as startup or expansion expenses. This will help you determine whether your projected income can cover expenses; if it does, that leaves a budget surplus, which can be put towards other areas.
Use your surplus funds to boost marketing initiatives or hire additional employees, pay down debt, or create an emergency savings fund. Keep track of actual vs. budgeted numbers to make sure that you’re meeting your goals on schedule.
9. Create a Business Plan
A business budget is an estimate of future revenues and expenses, including fixed expenses such as rent or mortgage, utilities, debt repayments, and monthly subscription costs, in addition to anticipated revenues and profits. Financial budgets are essential tools for business owners as they enable them to set measurable and attainable financial goals—be it year, quarter, or month specific—while keeping an eye on whether their goal has been reached or not.
Production budgets provide businesses with product-based businesses an estimate of how much it will cost them to create products and sell them, and then they compare this total against expected revenues to assess whether their profitability goals have been achieved.
