Entrepreneurship isn’t easy, and a business owner has to figure out a lot of things, some of which might seem daunting at first. For instance, budgeting is one area where a new business owner has to get good at because a business cannot start, much less thrive, without good budgeting.
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The task of finding the right financial information – and then learning the jargon of business finance – and putting it all together is downright intimidating for newbie entrepreneurs.
With so much learning involved, people with business ideas can get put off easily and quit before they can even start. Several studies indicate that most small-business owners do not have a budget to begin with. When done right, creating a business budget shouldn’t be too challenging.
Budgeting is often the least fun part of running a business – but if you want to succeed, creating and maintaining a business budget is absolutely vital. Therefore, to make this entire process a bit easier for you, here are some tips on how to create a business budget.
First, let’s examine why you need to create a budget for your business.
What is a business budget & why do you need one?
A business budget summarizes the finances of your company. It provides information about your current finances (including income and expenses) and your long-term financial goals. And if you still find it too daunting to learn or do budgeting on your own, hire an accounting expert. At least, with an open mind and a willingness to learn you’ll be able to understand how budgeting works. And if you are someone who wants to advance their career as an accountant by handling budgets for other companies, you have to pass the certified accountant exam. With a Professional exam review, you can easily assess your level of preparation.
An expertly-created budget will help you in the following ways:
1. Invest your money wisely
A business budget acts as a road map for your finances. You can use it to evaluate where your business finances currently stand and determine how to reach your financial targets.
2. Identify areas to cut expenditures or boost revenue
Your budget will reveal areas of your business where you can cut expenses or increase revenue, thereby improving your profitability.
3. Grow your business by capturing fundings
A detailed budget detailing your income and expenses is necessary if you plan to apply for a business loan or raise funding from investors.
Steps for Creating a Business Budget
After understanding why creating a business budget is so important, let’s move on to the actual reason you’re here for: how to create a business budget.
You must research the operating costs of your business before you can even draft a budget. To craft a practical spending plan, you need to know your costs inside and out.
Your goals will be jeopardized if you create a rough budget and later discover that you require more money for the operations. To cope with your growing expenses, your budget should allow you to generate more revenue and profits as your business expands.
Budgets should account for fixed, variable, one-time, and unexpected costs. Rent, loans, wages, Internet, bookkeeping, Hauser insurance in Cincinnati, and healthcare are examples of fixed expenses. On the other hand, variable expenses include product costs and labor commissions.
Considering that you will need enough cash to handle future expenses, it is not harmful to overestimate the costs. You need to include start-up costs as well if your business is brand new. If you plan your budget in this way, you can make smart decisions and avoid financial surprises if you plan your budget in this way.
Deduct recurring expenses
The next step in creating a business budget is to add up all of your fixed expenses. Costs that are recurring and necessary for the operation of your business are called fixed costs. Make sure to collect as much information on fixed costs as possible since they might occur daily, weekly, monthly, or even yearly.
You might have the following fixed costs within your business:
- Paying off debt.
- The payroll.
- Asset depreciation.
- Indirect taxes.
- You have insurance.
Depending on your specific industry, you’ll have different fixed costs than the ones described here. So, be sure to note any other fixed costs associated with your business.
Having identified your company’s fixed costs, you can subtract them from your income and proceed to the next step.
Calculate variable expenses
Costs that vary each month aren’t tied to a fixed price tag – and will depend on how your business performs. For example, usage-based utilities (such as electricity or gas), shipping charges, sales commissions, or travel expenses can be included in this category.
Costs that change monthly are, by definition, variable. In situations where profits are higher than expected, you can spend more on variables that will enable your business to grow faster. If, however, your profits are below expectations, you should consider reducing these expenses until your profits improve.
Estimate one-time expenditures
Whether fixed or variable, business costs or expenses are your regular monthly expenses. However, some costs will occur infrequently. Take them into account as well.
Adding one-time costs (such as a new laptop or an upcoming business course) to your budget can help you plan for such expenses and protect your company from being suddenly hit by unexpected headwinds.
Adding one-time expenses to your budget is not the only thing you should do; you should also include a buffer to cover unforeseen expenses, such as fixing a broken cell phone or hiring an IT consultant to handle a security breach. So that way, if an unexpected expense arises (and they will), you will be prepared for it.
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Add it Up
Now that you’ve gathered all of your sources of income and most of your expenses. How do you proceed from here? Combine or add all of the information or data to get a clear picture of your financial standing.
As you prepare your business budget, you will need to sum up your total income and expenses (i.e., total fixed costs, variable expenses, and one-time expenditures)then compare cash flows in (income) to cash flows out (expenses) to figure out your overall profitability.
The process of creating a budget can seem tedious. But, despite the extra effort, it’s worth it for the sake of your business success. A comprehensive budgeting process gives you the financial insight you need to make the best strategic decisions for the future of your company.