Preparing for the future, especially from a financial standpoint, is critical for all businesses. That’s why all businesses need to forecast their revenue and expenses to ensure they remain profitable. The best way for many small business owners to do this is through budget planning.
With a monthly snapshot of your expected business expenses, you can manage your money and track your spending habits. This allows you to forecast for things like take-home pay, wages, bills, and payments for loans or other debts. It can even help you set up an emergency fund.
By creating a workable budget, you can track cash on hand, expenses, and the revenue you need to keep your business growing, according to Nick Kolbenschlag, managing partner and co-founder of Crown Wealth Group.
“When you take the time to put the numbers to paper, you increase your chances of tracking them to ensure your business succeeds, helping you anticipate future needs, spending habits, profits and cash flow,” Kolbenschlag told business.com. “Proper budgeting also allows you to identify problems before they become major issues, giving you the ability to course-correct in real time.”
Your budget process should include updating your expenses monthly, which allows you to verify that your business is on target to maintain profitability. Here’s everything you need to know about budget planning for your business.
Budget planning is the process of creating a plan to spend your money. It allows you to determine in advance whether you will have enough money to do the things you need or would like to do.
Budgeting helps you save money for the long term or for when your business needs it most. If your accounting software doesn’t have budgeting features, use a budget calculator – a tool meant to help you establish a budget, create a savings plan, and pay down debt.
“Budget planning involves looking at external (economy, regulations and laws, etc.) and internal factors (staff, revenue, expenses, etc.) and then estimating needs, incorporating unexpected things, developing future goals, and looking at historical information and trends,” said JeFreda Brown, CEO of Xaris Financial Enterprises.
Budgets indicate how much money is spent on aspects of the business like payroll, advertising, supplies and other necessities. To create a budget, small business owners should look at revenue and expenses for the entire calendar and fiscal year. Look at what you spent the previous year and project if you will spend the same, less or more moving forward.
The goal of budget planning is to lay out all necessary components and brainstorm your goals, according to Shahid Hanif, founder of Shufti Pro. Hanif named some steps the budgeting process should include:
It’s best to categorize your budget by fixed expenses, variable expenses and non-necessities. Fixed expenses stay constant, regardless of the number of sales, according to Axel DeAngelis, founder of NameBounce.
“Generally, fixed costs are contractual,” DeAngelis said. “An example of a fixed cost is rent. Unless your business pays percentage rent based on sales, the rent is generally contractual, with fixed increases throughout the life of the lease.”
Variable expenses can include some bills or software, as business owners tend to have more control over these expenses, and they fluctuate based on sales. DeAngelis gave sales team commissions as an example: If your business were to sell 10,000 products, you would pay your sales team more in commissions than if you sold 100 products.
Non-necessities are expenses such as travel, entertainment or office perks like a flavored water cooler. This category usually does not include the monthly expenses your business needs.
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Budgeting for your business should include anything and everything you will spend money on during the fiscal year. Failure to use a budget for your business is a missed opportunity to meet your financial goals.
According to Ken Wentworth, founder and “on-demand CFO” of Mr. Biz Solutions, it’s crucial for business owners to analyze and include four key pieces of information when creating a business budget.
When planning a budget, make sure you know your revenue, cost of goods sold, overhead and margins.
Accounting software is a simple solution for budget planning. The main benefit of using accounting software is that it already has the formulas you’ll need within its programs. All that’s left is to add or transfer over the numbers specific to your business. An optimal accounting software program is affordable, accessible and easy to integrate with other platforms your business uses. Here are a few highly rated accounting software solutions to leverage in your budget planning.
A spreadsheet is one of the most common and versatile ways to budget for businesses. A spreadsheet can organize and catalog your expenses in charts and graphics. Many computers come with spreadsheet software, and there are also online programs such as Quip that integrate with other software, such as Salesforce. Spreadsheets use various formulas, depending on the report you’d like to create. You can create these formulas yourself or you can use premade templates, such as those found in Excel.
For those who haven’t used a spreadsheet to track expenses before, start with creating a monthly average formula. This gives you a better picture of your spending over the course of the year by creating annual projections. In the final formula, you’ll see where your spending and expenses will be at the end of the year if you continue with your current budget plan.
A cash flow statement is an often-neglected budget tool that is vital to long-term success. While an annual budget statement shows the total amount of sales and retained debt, it doesn’t show the individual transactions. Keeping track of these transactions could be the difference in your business losing money or retaining an overflow of debt.
A cash flow statement gives you the exact timeframe when a sale will be completed and when you’ve acquired debt. Keeping track of these details ensures you’re maintaining an accurate depiction of your credit and have enough cash reserves on hand to pay bills and expenses.
» Learn About: Cash Flow Calculator
A business budget should include all of your business’s current revenue and expenses. This budget should also include estimated or projected revenue and expenses. Brown listed three basic budget categories.
There are three budget categories to track – your operating budget, capital budget and cash budget.
Business budgeting is more complicated than balancing your personal checkbook. There are a lot of aspects to consider. It can be difficult to know where to begin. You may be afraid you’ll overlook an important component. A business budget template gives you a blueprint you can work with when designing your budget. This can save a lot of time and frustration.
Choosing a business budget template might seem daunting as well. However, there are some key features that will help you narrow your search.
First, you want a budget template that is easy to use. If you don’t interact with your budget regularly, it won’t be effective. Online templates allow you to access your budget anywhere and make edits. If the process is inconvenient, you’ll be tempted to do the budget once and forget about it.
According to the Corporate Finance Institute, customization is also important. You want a template that allows you to add items if you need to, and even change formulas if necessary. Every business is different. While budgets across businesses have many similarities, each one has its own nuances as well.
Business planning and creating a budget for your business are closely related, but they have different goals. Hanif said that planning is usually the first step in setting up a small business and continues to be used as a workflow progresses.
“Planning could be something simple, like building your daily agenda, or long-range enough to envision where you want to see your business in five or 10 years, whereas budgeting determines how existing financial resources are allocated. Budgets are usually set by how previous money was spent and expected income.”
Preparing a budget can be a difficult task, but once you do it, you’ll have a much better understanding of your business and how to plan for the profitability you’re looking for. If you regularly update your monthly budget, your annual budget will become easier to create and more accurate. When you know where your company stands financially, you can make better decisions to help your business be profitable and successful.
Joshua Stowers contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.