Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
When you’re a small business owner, every penny counts. To be financially successful, you need to carefully track your income and expenses so you can ensure a healthy profit margin. To do this, you need to create a small business budget. Though it may sound daunting at first, if you take the time to set it up and manage it closely, it can be a game-changing tool to help you reach your financial goals.
To help, we’ve put together a six-step guide on how to create — and manage — your small business budget.
1. Set up your budgeting system
Before you start breaking down the numbers, determine what system to use for creating and tracking your budget. If you decide to use a spreadsheet, you can find many free small business budget templates online, which give you the framework to get started. Otherwise, you may want to rely on an accounting program. Regardless of what you use, find a system that’s comfortable and easy to maintain.
2. Forecast your revenue
Once you have your system set up, you’re ready to start entering numbers. First, look back at your records from the previous year to find out how much income your business has been bringing in each month. If you’re just starting out, look at industry averages to figure out what kind of monthly income you can expect. Based on your records (or on industry averages), add up all your recurring and expected income sources, and forecast what your revenue will be for each month of the year. If you have a seasonal business, take note of slow months throughout the year, as you need to project lower revenue during those months to plan accordingly.
3. Tally your fixed costs
Now you’re ready to start tallying up your expenses. Start with your fixed costs, which include your regular operational costs that do not change, such as rent, loan payments, and insurance. To make sure you don’t miss any of these costs, refer to your previous account statements (if possible) to identify all your business’s fixed costs. Once you’ve added these up, subtract them from your revenue total.
4. Calculate variable expenses
After you’ve figured out your fixed costs, you need to make a list of your expenses that can vary from month to month. For example, your utilities, phone bills, or supply costs may fluctuate. While many of these expenses are necessary for your business, when you go through these costs, you may find extras that you can cut out. If business is slower during certain times of the year, consider trimming down variable expenses, such as marketing costs, to make more room in your budget.
5. Set up an emergency fund
As a business owner, you know one-time costs are inevitable. And not only that, they seem to come when it’s least convenient. Whether your computer crashes, or you end up needing new equipment for your business, you need to be prepared for these unexpected costs. To do this, make sure you’ve got some padding in your budget. If you’ve found some unnecessary variable expenses you can cut back on, for example, you can free up some cash to set aside for an emergency fund. By doing this, you can have peace of mind that you’re equipped to cover surprise one-time costs that come your way.
6. Do a monthly analysis
For your budget to be meaningful, you need to maintain it on a regular basis. At a minimum, do a monthly analysis to see if you have more revenue coming in than costs going out. By monitoring closely, you get better insight into your financial picture, and you can see if changes or cutbacks are necessary to make your business more profitable. You’re also able to notice trends and changes, and make adjustments so you can more accurately budget for the future.