How to Create a Business Budget in 5 Easy Steps
Budgeting for business is made easy with the right process, platform and discipline to stick with it.
Starting your own business is an exciting endeavor, but after the honeymoon phase it's easy to get stressed about revenue and where your finances are standing. The key to staying on top of your finances is to create a business budget and stick to it.
A well-structured budget helps you stay on top of your income and expenses, allowing you to make informed decisions and achieve your financial goals. Here we'll guide you through the process of creating a business budget in five easy steps.
What is a Business Budget?
A business budget is a financial plan that outlines your expected revenue, expenses, and profit over a specific period, usually a month, quarter, or year. Similar to a personal finance budget, it serves as a roadmap for managing your business finances, ensuring that you allocate resources wisely and maintain financial stability.
Why is Budgeting Important to a Business?
Creating and following a business budget will be beneficial to you for several reasons, including:
- Financial control:
- A budget helps you control your business finances by helping you become aware of your spending limits and tracking your income and expenses.
- Goal setting:
- Business budgeting enables you to see what's possible for your business and set achievable financial goals, whether it's increasing profits, reducing costs, or saving for expansion.
- With a budget, you can make informed decisions about resource allocation, investments, and growth strategies.
- Cash flow management:
- Budgeting ensures you have enough cash on hand to cover expenses and prevent cash flow problems.
- Performance evaluation:
- You can use your budget to help evaluate your business's financial performance and adjust as needed.
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What Should a Business Budget Include?
Before we dive into the process for creating a business budget, let's cover the key elements your budget should include:
- Projected monthly revenue:
- an estimate of how much money you expect to earn from your products or services.
- Projected expenses by category:
- a breakdown of your expected costs, categorized into operating expenses, fixed costs, and variable costs.
- Profit calculation:
- determining your expected profit by subtracting projected expenses from projected revenue.
- Profit allocation:
- deciding how you'll allocate your profits, whether it's between reinvesting in the business, saving, distributing to stakeholders, community giving, or more
- A budget review plan:
- deciding when and how frequently you'll sit down to review and adjust your budget
5 Steps to Create a Business Budget
- Add up your projected monthly revenue.
- List out your projected expenses by category.
- Calculate your profit.
- Divide your profit.
- Review your budget consistently.
Ready to create your business budget? Here's your step-by-step process.
1. Add up your projected monthly revenue.
Begin by estimating your monthly revenue. This includes all sources of income, like sales, services, and any other revenue streams. Be conservative in your estimates to ensure you don't overestimate your earnings.
2. List out your projected expenses by category.
Create a list of all your anticipated expenses. Organize them into categories like operating expenses (rent, utilities, salaries), fixed costs (loan payments, insurance), and variable costs (marketing, materials). Include both recurring and one-time expenses.
3. Calculate your profit.
Now, subtract your projected expenses from your projected revenue to determine your expected monthly profit. This figure is a helpful indicator of your business's financial health.
4. Divide your profit.
Decide how you'll allocate your profits. Set aside a portion for an emergency fund, working to build up three to six months' worth of expenses to cover you during slow seasons or hard economic times. You may need to dedicate a portion to reinvesting in the business for growth, paying off debts, or distributing dividends to stakeholders. Keep taxes in mind and whether there's a community cause you want your business to help support. Lastly, don't forget to pay yourself!
A good rule of thumb is to set aside 25% of your net profit for taxes.
5. Review your budget consistently.
Creating a budget is not a one-time task. To ensure its effectiveness, commit to reviewing and adjusting it regularly. Compare your budget to your actual financial performance to identify variances and make necessary changes.
Make this a date in your calendar every two weeks or every month and make it fun so you stick to it. Maybe you do your budget review at a different coffee shop every month.
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Best Platforms for Business Budgeting
Creating your business budget can be made simple with the help of budgeting software. Some popular platforms for business budgeting include:
- QuickBooks a comprehensive accounting software that offers budgeting features
- Xero a cloud-based accounting software with budgeting and forecasting capabilities
- Zoho Books provides budgeting and expense tracking for small businesses
- Mint a free budgeting tool for personal and small business finances
You can also find free budgeting templates in Google Sheets for a more DIY business budgeting approach.
Creating a business budget is a vital step in managing your company's finances effectively. By following these five easy steps and using the right budgeting tools, you can gain better control over your finances, make informed decisions, and work toward achieving your business goals. Remember, consistency is key, so make it a habit to review and update your budget regularly to stay on track and adjust as needed.
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- A business budget helps you plan how to intentionally spend your business profit and stay in control of your business finances.
- A good rule of thumb is to set aside 25% of your net profit for taxes.
- It's essential to save three to six months' worth of operating expenses in an emergency fund to be ready for contingencies.
- Review your budget weekly to ensure you're on track.
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APR = Annual Percentage Rate