One of the first few things we do as working adults is come up with a budget. For individuals, a budget helps them plan their expenses, spend within their means, and meet their savings goals. Similarly, businesses need a budget too.
A business budget estimates revenue and expenses for your business over a period of time, usually over a year. Some small businesses don’t bother with a budget, but it’s a very important financial document to have.
The benefits of having a business budget include:
- Provides you a rough idea of your estimated profits for the year. This helps you plan advertising and business expansion strategies ahead of time.
- Helps you identify areas where you can cut back on expenses or boost revenue. The budgeting process gives you an opportunity to review current service providers, negotiate better rates, or switch to more cost-effective alternatives.
- Helps you make sound business decisions. A well-thought-out budget tells you how much risk you can afford to take on without going under. Having that point of reference allows you to say ‘no’ to expenses that aren’t financially feasible for your business.
- May be required when you apply for a business loan.
Creating a basic business budget involves five main steps:
Step 1: Calculate your expected revenue. You can look at historical data, for e.g. your sales numbers over the past few years, to forecast this figure. Alternatively, you can base this on your pre-orders or the number of people on the waitlist for your product or service.
Step 2: Calculate your fixed costs. These are the costs that more or less stay the same over the short-term regardless of your sales volume. This includes office rental, utilities, salaries, and insurance.
Step 3: Calculate your variable costs. These are the costs that vary with your sales volume. This includes the cost of raw materials and shipping.
Step 4: Identify any one-off expenses for that time period. Do you need to purchase any additional equipment for your business? Do you need to invest in workshops/seminars for yourself or your staff? Calculate how much these one-off expenses will cost you.
Step 5: Bring all these numbers together. Can your estimated revenue cover your costs? If not, think of ways to bring in more revenue or cut down on cost.
Excel offers a number of business budget templates with built-in formulas and charts that you can use to get started. Next week, we’ll talk about other must-have financial tools for your business.