I have a business!! What’s my Budget?

Studies show many business owners don’t have a budget?  Why? Because it’s intimidating.  Where do I begin?  How do I create a budget?  What is a budget?  The process of creating a budget isn’t complicated when broken down.  But first, let’s discuss the reasons why you need a budget

  • A budget points out unused funds that can be reinvested
  • A budget identifies slower months and allows time to rearrange
  • A budget is a window into the future and can predict what needs to be done to become profitable

So how do we do that?  Listed below is a comprehensive set of steps to take.

  • Examine your Revenue – Record and total each income source coming into your business each month.  Remember to calculate revenue, not profit (revenue less expenses).  For start-ups, you may have to do some research to figure out the cost of products or services within your area’s industry to forecast.
  • Add up and subtract Fixed Costs – Fixed Costs (costs that do not change month to month) are costs such as rent, supplies, debt repayment, payroll, depreciation, taxes, and insurance.
  • Add up and subtract Variable Costs – Variable Costs (costs that change month to month).  Some examples are the owner’s salary, replacement of old equipment, office supplies, marketing costs, and professional development.
  • Set aside a “Contingency Fund” – This is a fund for those unexpected emergencies or circumstances.  Like the stove that blows out the day before the Thanksgiving dinner, you are hosting 50+ people; the same happens in business.  It can be tempting to spend a surplus from prior months when first starting.  Placing these funds in a “contingency fund” will avoid future disruptions to your business.
  • Create a monthly Profit and Loss statement.  The profit and loss statement is simply a recap of the previous steps.  It entails adding up all of your income for the month.  Add up all of your expenses for the month. Then, subtract the expenses from the income.  A positive number indicates a profit.  A negative number indicates a loss for the company.
  • Forecast future profits – Forecasting is just an educated guess based on past patterns.  For the past 12 months, you’ve done all the addition and subtraction, created P&L statements, and are now ready to forecast.  Looking at the prior quarters, you can forecast how much you expect to make going forward and implement any growth strategies. For example, suppose the company made approximately $500 each month for the prior quarter. In that case, the expectation is the company will make the same for the next three quarters provided no change in activities or environment.  Additionally, implementing the “ABC” strategy will increase revenue by 25% each month.

Overall, a budget provides control over the business’ financial activities.  It fosters efficiency and can assist with the company’s economic success.  It also helps avoid unnecessary financial burdens by identifying areas of improvement.