How to Create an Effective Small Business Budget

How to Create an Effective Small Business Budget

Even in 2020, the number of small businesses in the U.S. grew to over 31 million. Starting your own shop is still a popular dream among Americans, but the key is handling your money right to sustain your business.

So what goes into business budget planning for small businesses? What do you need to know to budget your small business the right way?

That’s what we’re here to look at today. Read on to find out how to create an effective small business budget.

Why Make a Budget Anyway?

Budgeting for your business is basically an evolving analysis of how much money you spent and how much you’ll need in the future. It’s an educated guess about what your business will look like in the coming months.

You have to look at what you spent this month, how it compares to last month, and how it all fits with your needs for the upcoming month. This lets you have the right amount of funds in place for any situation. 

As such, a budget helps prepare you and your business for most financial climates. While some of it can be guesswork, that doesn’t mean you’re always left out to dry. 

Examine Revenue

The first thing you should do when figuring out how to create a business budget is examining your revenue and income sources. Add everything together to see how much money your business is making.

Make sure you calculate revenue here, not profit. That is, don’t subtract any costs yet.

Once you have your income streams, divide them by 12 to find your monthly income. This might vary in real-time, but it’s a key step nonetheless. 

Fixed Costs

Now that you have your revenue, it’s time to find your fixed costs with which to subtract for profit. These should be costs that don’t change much or at all during the year.

This might be things like rent, payroll, taxes, and other services. Find these numbers and subtract them from your income. 

Find Variable Expenses

Identifying variable expenses is key for controlling your budget and revenue throughout the year. These are costs that change from month to month. 

If you’re experiencing a profitable month, you can spend more on variable expenses and vice versa for leaner months. These costs are often things like equipment, utilities, and development costs. 

Contingency/Rainy Day Funds

If you’re running your business right, chances are you’ll have some extra revenue that doesn’t go straight to paying off expenses. These should be saved as contingency funds. 

You can also call them rainy day funds, as they act as emergency cash if something you didn’t account for pops up as an immediate cost. Being ready for these emergencies will keep your budget from varying too much. 

Profit and Loss

With everything in place, add up your income and expenses and subtract one from the other. This will be your profit and loss statement, or P and L.

Depending on your business, this might be a large positive number or a small negative figure. Understand that many small businesses aren’t very profitable for the first few years. 

Budgeting properly month to month can help that number grow incrementally. Tools like Sage Intacct are extremely helpful at strategically controlling your budget. 

Creating the Right Small Business Budget

Making your first small business budget can be a confusing and harrowing task. If this is your first go at budgeting, use this guide to help you create the most effective budget possible.

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