Last Updated: Dec 29, 2017
How do you create a budget for your small business? What needs to go into it and how do you figure out what your expenses will be? Find out here.
Not much of an accounting type? As a small business owner, you’re going to need basic accounting skills or you risk closing your doors—not because you had a bad product or service but because you didn’t manage your money well.
The cornerstone of any accounting procedure is a budget. In your personal life, it might be possible to get by without a budget, but in your business, it’s a recipe for bankruptcy. Even the smallest of businesses have a more complex financial picture than individuals. Tracking every dollar and measuring it against a budget is the only way to know if you’re charging too little, paying too much for supplies or labor, or have money to upgrade equipment, for example.
It may seem simple but let’s take a minute to really define what we’re doing. A budget forecasts or estimates your revenue and expenses over a period of time. For a small business, it’s usually a calendar year but some businesses, such as those that operate seasonally, they may elect to use a fiscal year.
Before you create your budget, you have to define your sources of revenue. They could be from sales, accounts receivable, interest, or other sources specific to your industry. As you add revenue streams, your budget may change drastically.
Expenses work the same way. Define every person or company that receives money from you. Once you complete your budget, the goal is for it to balance. Revenue equals expenses. One of the most powerful benefits you receive from a budget is its ability to keep you honest. If you’re spending more than you’re earning, you have to cut expenses and/or increase income.
1) Do Some Research- If you’re starting your business or have not kept good track of your financials in the past, research the typical costs and sales trends of other businesses in your sector. You probably have a friend who owns a business like yours—start there.
2) Stay Simple- Just like your personal life, the more complicated and time consuming your budget, the more likely you are to shy away from it. Your paper clip expenditure doesn’t need its own subcategory. Office supplies will work fine. If your business is small and you keep detailed records of each entry, you may only need a handful of categories.
3) Start with the Past- If you use accounting software like QuickBooks, you can generate a budget based on last year’s numbers. Then, adjust some of the numbers as needed. The past is a good indicator of the present assuming nothing about your business or the economic environment has changed.
You have your list of incomes and expenses, you have a pretty good idea of what sales will look like in the coming year, and you have goals. Goals might include cutting the annual cost of a certain raw material or reducing employee mileage reimbursements a certain percentage.
Next, create line items for each of your incomes and expenses or use more general categories. You can get as detailed or general as you would like in your categories as long as the entries hold a lot of detail.
Finally, fill in the numbers for each. Look at last year’s income and use a number close to that as your starting point. Do the same with your expenses.
Once you’re happy with how each category looks, compare them. If you’re spending more than you’re bringing in, you’ll have to make adjustments.
Although your budget should be a document that helps to keep you honest about the health of your business, it will undergo changes. If you get to the middle of the year and you’ve brought in 20 percent more income than expected, you might be able to allocate some of the extra income to a line item that you reduced at the beginning of the year.
If there was an unexpected rise in cost that affects one of your line items, you might have to cut from somewhere else. You don’t want to constantly change your budget but making adjustments are fine as long as it remains balanced.
The best way to create a budget is through financial software. QuickBooks is a favorite of many small business owners. Like its competitors, it’s not just a complete accounting package; it will create a budget for you based on past trends. You can make next year’s budget in minutes versus hours.
Plus, using financial software for your business just makes sense from an accounting standpoint. Gone are the days of pencil and pape, and an excel spreadsheet is probably not the most efficient means of accounting either.
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