By Sabrina Loh
As a new business owner, there are a lot of things that you have to figure out. From marketing and building your presence, to hiring staff and finding clients, the one thing you should stay on top of from the getgo is your business budget.
According to a study, one of the top reasons why businesses fail is because they run out of cash. One way to avoid this is by creating and maintaining a business budget — It’s the most critical component for the success of your business.
What is a business budget?
A business budget is a detailed financial plan for businesses that provides an estimation of revenue and expenses over a period of time, such as monthly or yearly.
It’ll help you to:
Make smarter financial decisions
Identify where to cut spending or grow revenue
Analyse the difference between your vision and reality
Keep you out of debt
Leadership expert John Maxwell couldn’t have summed it up better: “A budget is telling your money where to go, instead of wondering where it went.”
Now that you know why creating a business budget is so important, here’s how to do it in 5 steps:
Step 1: Calculate your estimated revenue
Your revenue is all the income you make from your business before expenses are deducted. Profit is what remains after deducting expenses.
Ideally, collect 12 months of information to estimate your monthly revenue. Otherwise, base it off of industry averages if you’re a brand new business.
Use this data to examine how your revenue changes throughout the year. Perhaps it may experience a spike in sales during festive seasons, or may dip in the new year.
Understanding these changes can help you to prepare a financial cushion for dry months.
Step 2: Subtract fixed expenses
Your fixed expenses are regular, recurring expenses that are necessary to your business, such as office rental, website hosting, staff payroll, debt repayment, accounting, equipment rental, and more.
Add these costs together and subtract that from the estimated revenue.
Step 3: Include variable expenses
Variable expenses change from month to month and include things like travel costs, office supplies, replacing equipment, software subscriptions, and professional development.
Variable costs might also include any freelancers that you outsource, where else your in-house team salaries would fall under fixed expenses.
During dry spells, variable expenses are the area you’ll have to cut back on. However, when profits are high, you may spend more in this area to help your business to scale.
Step 4: Set up an emergency fund
When an unexpected expense pops up (and they always do), you’ll be more prepared by having some extra cash set aside in your business budget.
These could be things like the office toilet getting clogged, a dry month, a security breach, or equipment breaking down.
Although it may be tempting to spend more on variable expenses during an extra profitable month, you should put the money in your emergency fund first.
Step 5: Put it all together
Once you’ve collected all the information above, you can create your profit and loss statement.
The formula is simple:
Total Revenue – Total Expenses = Profit (if it’s a positive number) / Loss (if it’s a negative number)
It’s important to note that even if your business boasts an impressive revenue number, it may still be suffering a loss if you’re spending too much on your expenses.
This data is powerful because it can give you insights on how to adjust your expenses to become more profitable. Or, you may realise that your business is very profitable and consider reinvesting your profits back into your business, such as investing in new equipment or hiring more staff.
The Bottom Line
Creating and maintaining a successful business budget takes time and effort, however, it will pay off in the long run.
With a business budget in hand, you’ll be armed with data to make smarter financial decisions for your company to help it to grow and prosper.
For more guides like this, tune into the BigPay blog every week.