Starting a small business is a lot of work, from getting a business license and insurance to creating a budget that works for your business. If you need help creating a small business budget, follow these 6 steps and you’re good to go.
1. Look at Your Revenue
The first thing you need to do when creating a small business budget is take a look at your revenue. You can’t spend more than you make, so your revenue will give you a good starting point in terms of what you have money for. It’s important that you don’t look at profit for the first step of creating a budget, since your expenses will be factored into the equation later.
2. Consider Fixed Costs
Once you know how much revenue you’re bringing in, you can start to subtract the money you spend to operate your business. Fixed costs are the first thing you need to consider because they’re the ones you’re guaranteed to incur. Some examples of fixed costs include rent, payroll, supplies, taxes and insurance. Since you have to pay all of these on a regular basis, they’re a critical part of your budget.
3. Consider Variable Expenses
Fixed costs aren’t the only thing to consider when creating a small business budget. There are several variable expenses that you have to plan for even if you don’t know when you’ll incur them or how much they’ll cost. These variable expenses include things like repairing or replacing old equipment, paying the owner’s salary, office supplies, marketing costs, and more. Understanding your budget when you have these expenses is an important part of preparing for the inevitable.
4. Make a Rainy Day Fund
Speaking of making sure your small business is prepared financially, you should also have a rainy day fund that gives you some breathing room in case of an emergency. If equipment suddenly breaks down or you have to pay for equipment upgrades that you can’t afford, a rainy day fund serves as a backup solution that helps you take care of any unexpected expenses. The size of your rainy day fund depends on what kind of expenses you might be stuck with.
5. Create a Profit and Loss Statement
Once you have some basic information about your revenue, expenses and potential emergency expenses, you can create a profit and loss statement. This is the part of the process where you might want to consider investing in financial planning software to help you out. If you don’t want to use this software, simply take all your monthly expenses, add them together and subtract that number from your revenue. If you come out with a positive number, you’re making a profit. If not, you need to make some changes to your financial plan.
6. Create a Future-Focused Budget
Now that you’ve got all the present and past stuff figured out, you can start planning for the future. You need to consider how profit and loss may change from season to season. Perhaps there are certain seasons where business slows down, or maybe a piece of equipment needs to be replaced every two years. Whatever the case may be, your budget should account for all the ways that your profit and loss may change in the coming years.
It may be rewarding, but owning a small business also comes with a lot of hard work. As a business owner, you have to tackle numerous tasks to help keep your business afloat and growing. With a little bit of time and effort and the help of financial planning software, you can create a budget for your small business in no time.