Are you looking for ways to make more money and make your small business more successful? As a small business owner, one of the best things you can do is to create a business budget. A business budget helps business owners plan for their future, ensure money is being used efficiently and effectively, and stay on track towards achieving goals.
In this article, we will discuss what to include in your business budget, the benefits of having a business budget for small businesses, steps for creating an effective budget and tips for sticking with it. Keep reading to learn some great tips that can help take your small business to the next level!
What Is Budgeting?
Budgeting is a process of predicting future income and expenditure over a given period. It helps every business owner understand what money they have coming in, as well as how much they're expected to spend.
A budget also serves as an action plan for managing all expenses in line with overall business goals, enabling owners to make informed financial decisions. Budgeting can involve: estimating costs and revenue, setting sales targets and forecasting cash flow projections over the next year or months ahead. According to survey data, 79% of small business owners agree that having a budget is essential for success.
You can start preparing your business budget as early as right after you have registered your business or incorporated your company.
Benefits Of Budgeting For Small Businesses
Benefit #1: Improved Cash Flow
A budget is essential for improved cash flow for small businesses. By forecasting income and expenses, entrepreneurs can gain insight into their financial health as well as where to invest or cut back money depending on the situation.
Having a budget in place helps small business owners ensure that they have enough money to cover both short-term and long-term expenses. Furthermore, by understanding current spending patterns and future trends, business owners can manage unpredictable surges in sales or costs which could result in significant losses if not managed proactively.
Benefit #2: Greater Financial Control
Having a budget in place gives small business owners greater control over their finances and enables them to plan for the future. It provides with an overview of income, expenses and cash flow which helps to identify potential problems before they occur.
Having up-to-date accurate records also makes it easier to access loans should there be a need for working capital. Moreover, establishing spending limits can help keep costs down and prevent impulsive purchases that could hurt the bottom line.
Benefit #3: Increased Profitability & Efficiency
Business owners need to create a budget in order to help them monitor their financial situation and increase profits. A budget helps businesses control fixed & variable costs, and identifying areas of waste. Businesses can see exactly how much money is coming in and what it is being spent on. This type of analysis allows business owners make decisions that will improve profitability in the long run.
Budgeting also provides an opportunity for small business owners to forecast future sales based on actual performance, which can help with understanding where profits are likely to come from. Knowing what goods or services are selling well makes it easier for businesses to adjust pricing accordingly, creating more revenue opportunities and improve their profitability over time without sacrificing quality goods or services they offer their customers.
Furthermore, an effective budget can help small business owners identify areas where they can make savings and streamline processes to become more efficient. By allocating funds effectively across different types of expenses such as direct costs, materials cost or service outsourcing fees, it’s possible for businesses to boost their overall margin too.
Benefit #4: Improved Planning
Having a budget can help small business owners improve their planning. According to statistics, 19% of small businesses use a budget to track progress towards their goals.
Having an effective system in place for forecasting cash flow and expenses can ensure that there is enough money available to cover operational costs or make necessary investments in the future. Furthermore, by getting an accurate insight into projected sales, projections and anticipated expenditure, businesses have greater control over when they purchase goods and services, minimizing overspending and reducing wastage within the company. With careful monitoring of budgets regularly updated with realistic estimates, small business owners will find it easier to stay on track with their plans.
Steps For Creating An Effective Budget
To ensure your business’s financial success, start crafting an effective budget by setting goals, tracking expenses and analysing income and expenditure.
Step #1: Establish Goals
Setting goals is an important first step in budgeting for small business owners. Goals will help determine the budget that needs to be set and monitored, as well as provide direction and focus when creating a plan.
Before setting up budgets, business owners should define their objectives such as desired sales volume or estimated revenue. They must also consider upcoming investments and changes which may have an impact on the financial position of their businesses. It's also important to factor in expected income, realign goals if necessary, and account for unexpected costs such as natural disasters or market fluctuations. A good goal-setting process serves as the foundation of any successful enterprise, so it's wise to take your time to create realistic targets that are achievable within a reasonable timeframe.
Step #2: Track Expenses
Tracking your expenses is a critical part of creating an effective budget. It's important to have an accurate record of all income and expenditure as it can allow you to make better financial decisions.
You should identify which expenses are fixed costs and which ones are variable expenses, from payroll costs to office supplies. In addition, tracking your business assets and other resources such as raw materials allows you to estimate the necessary purchasing for future budgets.
Also, it might be beneficial to use an accounting software or online tools that generate detailed reports on spending money over the budget period. Finally, by monitoring regular payments such as loan repayments, tax payments and interest rates can keep track of how much profit you’re making in any given month or fiscal year.
Step #3: Analyse Income And Expenditure
Analysing income and expenditure is essential for producing an accurate budget. Business owners need to look at how much income they generate from regular activities such as sales, investments or donations, as well as where their money goes - like rent, wages, utilities and taxes.
By breaking it down into categories businesses can get a better understanding of their financial situation and make adjustments if necessary. Additionally, tracking the movement of funds will help identify areas where money might be wasted so that changes can be made in the future budgets.
Step #4: Adjust Budgeting Goals
Once you have tracked your expenses and analysed the income and expenditure for each category, it is time to adjust your budgeting goals. You may find that some of your monthly estimates or costs are higher or lower than expected.
Adjusting budgets can help you better manage cash flow and keep unplanned costs under control - all essential elements on the road to business success. Taking sales budget for example, if there are seasonal fluctuations in sales revenue then adjusting these figures will ensure more accuracy in subsequent budgets.
Step #5: Monitor Budget Performance
Monitoring your budget regularly will help you to keep track of your spending. It's important to review how much money is coming in and going out, as well as if any unexpected costs have arisen since it was last updated. Additionally, monitoring performance can show where improvements can be made or areas that require additional funding.
Tracking progress against estimated revenue can also reveal potential issues within a full business plan. Comparing the actual figures with the initial projections for fixed costs such as rent, payroll and materials reveals whether there are any excesses or savings that could be made by reworking elements of a budget. Similarly, compare sales forecast from month to month in order to identify trends emerging in relation to customer demand and market strategies.
By keeping an eye on your budget regularly, small business owners can ensure that their cash flow isn't subject to large fluctuations caused by overspending or costly mistakes being made when allocating funds at certain times throughout the year.
What Expenses To Include In Your Business Budget?
Expense #1: Fixed Costs And Variable Expenditure
Fixed costs or fixed cost are expenses that need to be paid regardless of how much or how little a business produces. They include rent, insurance premiums, website hosting charges and utility bills.
Variable costs, on the other hand, change as sales fluctuate and can include raw materials, transport costs, labour costs and packaging materials.
An effective budget should include both types of spending in order for business owners to get an accurate picture of their current finances. Furthermore, most successful businesses set aside enough money in the budget for marketing efforts and professional fees in order to guarantee success down the line.
Expense #2: Capital Expenditure
Upfront capital expenditure (CAPEX) is an initial cost that businesses incur in order to purchase long-term business assets and necessities such as land, buildings, machinery and equipment. Long-term capital expenditure (LT CAPEX) on the other hand is the percentage of money invested over a long period of time, usually more than one year to benefit from either replaceable or irreplaceable benefits.
Small businesses should plan carefully for both upfront and long-term capital expenditure as it will have a major impact on their operating budget.
Expense #3: Payroll Costs
Payroll costs consist of wages, salaries and other employee benefits. This is one of the largest expenses for many businesses, so it needs to be monitored closely in order to keep budgets balanced.
Estimating payroll cost involves careful planning and forecasting based on past trends as well as future growth potentials. By understanding these figures, business owners can make informed decisions about staffing needs while staying compliant with all applicable labor laws and regulations.
Expense #4: Business Taxes
Business taxes are a necessary part of running a small business and should be included in the budget. Depending on their structure, businesses can be subject to income tax, withholding taxes, or sales and services tax ("SST").
These costs need to be factored into the budgeted expenses for accurate planning purposes. By tracking spending carefully and setting aside funds for business taxes every month, businesses can ensure they have enough money available when it comes time to pay their dues and keep up with compliance requirements.
Expense #5: Interest And Loan Repayments
Interest and loan repayments should be included in a small business budget. As interest rates can differ, it is important to know the full cost when taking out loans or entering into costly credit agreements.
When creating a budget for these payments, it is important to factor in both current business costs and future needs such as interest rate increases. Many businesses overlook this expense and end up struggling with cash flow in the long run due to heavy debt repayment commitments. To ensure success, small business owners must properly account for such expenses as part of their budgeting process so that they have enough money available each month to cover them without running low on cash reserves.
Expense #6: Unexpected Costs
Unexpected costs can significantly set back small businesses, particularly when funds are already tight.
It's important for business owners to consider potential risks before creating a budget and plan for unexpected circumstances other costs that could arise in order to stay on track. When implementing a budget, it’s best practice that businesses factor in an additional 10-15% on top of the expected expenditure as this will help cover any unanticipated costs. Having an emergency fund separate from your main budget has also been shown to be beneficial when managing unforeseen expenses.
Tips For Sticking To Your Budget
To help ensure the success of your business, consider setting up alerts, automating payments where possible and regularly reviewing progress against budget goals.
Tip #1: Monitor Expenditure Regularly
Monitoring expenditure regularly is essential to creating a budget for small business owners. It’s important to know where money is coming from and going, in order to make the best financial decisions for your business.
Software tools can also be used to track spending on a daily or weekly basis. This allows small business budgets and owners to quickly get an overview of their budget performance over time and make adjustments if needed.
Tip #2: Set Up Alerts For Overspending
Setting up an alert system can be a great way to help you stay on track with your budget. This ensures that any potential overspending is identified and quickly rectified, so you don't end up going over your estimated budget for the month.
By setting up alerts in your accounting software, or through other financial tracking systems, you can be warned when something appears to be out of line and requires attention. This will help ensure that you always have enough money available to cover necessary expenses without incurring unnecessary debt.
Tip #3: Automate Payments Wherever Possible
Automating payments wherever possible is an excellent way of ensuring that your small business budget remains within the allocated limits. There are many apps and fintech softwares in the market now offering the ability to automate payment functions, such as setting up direct debit for regular expenses like rent and utilities.
It is also extremely useful to set up recurring invoices to customers which you’ll receive payments automatically, helping with cash flow management. Doing this also eliminates human error when manually entering data and reduces administrative overheads associated with ‘manual’ tasks.
Tip #4: Keep Track Of Receipts
Receipts are an important part of budgeting as they provide tangible proof of spending. Keeping track of receipts allows small business owners to ensure that their budget remains accurate and up-to-date.
As such, it is advisable for business owners to log all expenses and make sure that their records are accurate. Receipts can be kept either digitally or physically in the form of paper invoices and receipts. By keeping a record of every transaction made throughout the year, small business owners can better analyse their cash flow and spending habits on different categories like marketing costs or office supplies.
Conclusion
Creating a well- structured budget is essential for the success of any small business. It can provide owners with an understanding of their finances, helping to make better financial decisions and control outgoings.
With regular tracking and updating, businesses can use budgets to ensure they have enough money available to cover all costs associated with running the business as well as preparing for unexpected costs. By using realistic budgets and taking into account estimated income, expenses and cash flow in each budget period, small businesses will be able to set realistic goals and measure progress towards them which is key to ensuring long term business success.
