How To Create a Budget That Works for Your Business

Creating a budget is one of the most underrated aspects of running a business. Owners want to make sales, work with clients and spend time on exciting tasks rather than crunching numbers and seeing how much money they can spend each week.

However, without a budget, you risk spending more money than you’re bringing in each month, leading to business failure.

Nearly 1-in-5 businesses will not be in business after the first year of operation. If you maintain a strict budget, you lower your risk of running out of working capital. In this guide, we’re going to walk you through the steps of how to create a budget starting today.

What Is a Business Budget?

A business budget is a detailed spending plan that’s based on the company’s income and expenses. You'll use your budget data to learn about your:

• Spending
• Capital
• Potential revenue

You can also include loans and capital expenditures in your budget to help guide your operations.

What is the best way to create a budget?

Software and applications take the hard work out of forming a budget and reduce errors. However, it’s also a good idea to know how to create one manually.

How To Create a Business Budget: Why Do It in the First Place?

Budgets are one of the best methods of controlling your finances and can help you in multiple ways:

• Improve your decisions: Should you invest in new growth opportunities? Do you have the working capital and cash flow to make these investments? This is one of the most powerful aspects of budgeting because it allows you to make the right decisions about your company’s future based on concrete data.
• Manage your money: When you’re making sales, it’s easy to overlook your bad spending habits. Uncontrolled spending will cause you to put your company at risk of failure. Budgets allow you to properly manage your money.
• Monitor your business’s performance: Business performance is something that should be monitored and followed. If you don’t follow the data and learn where you went right and wrong with your budget, you’re making a major mistake. Your budget will allow you to follow the growth or slowing of your operations and make corrections as a result.
• Capital allocation: Where should you spend your money? Where should you lower spending? A budget will help you better understand where your capital is being spent.
• Investor funds: If you want to secure capital from investors, they will review your financials before opting to invest in your business or not. A strict budget will make it easier for you to seek funds from both investors and traditional lenders.
• Goal setting: Businesses have goals for their budget, and this is something that you should be considering, too. Budgets allow you to allocate money to your goals, such as putting more money into one division to help it generate more revenue.

Follow the steps below and you’ll be well on your way to making your first accurate budget.

Cost Analysis

What is the true cost of running your business? The foundation of every budget revolves around your costs. If you’re already in operation, you can look through your accounting books and expense statements to understand the following:

• One-time expenses will need to be accounted for in the coming accounting period. For example, you may need to hire ten new employees, so you use a recruiting agency to help secure the best talent. These types of one-time costs must be considered for each budget period.
• Fixed expenses are the ones that you’ll have month after month, and these will include things that are in contract, such as leases, mortgages, utility costs and so on. For the most part, these expenses are the same from one month to the next or may vary slightly when the provider raises their prices. Salaries will also be considered fixed costs, even though your employees may get a raise every year.
• Variable costs are also a major expense, and these will be things such as the cost of goods or having to hire outside labor. For example, let’s assume that 20% of your costs are from outside labor that you commission, and you receive a bulk order of goods that was unexpected. This would be a variable cost. You couldn’t have known that the commission would be necessary and the increase in the cost of goods would exist. This is a variable cost.
• Unexpected costs must also be considered because business is never certain. For example, you may look through your historical data and find that each month, you have 5% unexpected costs. You should factor this data into your overall budget.

Your cost analysis is one of the most important parts of your budget, and you need to figure all of these costs out properly. Don't forget to add in things, such as paying taxes or making loan payments. Every expense that you have will have to be added to your cost analysis.

Estimate Your Income/Revenue

Creating a budget also means knowing your general income and revenue for the accounting period. You can make major mistakes when estimating your revenue because you overlook:

• Seasonal trends
• Economic factors
• Etc.

Instead, if you’ve been in operation, you can use your historical data to help you estimate your revenue with greater accuracy. You can also add in variables to better calculate revenue, such as:

• Accounting for growth
• Seasonal slowdowns
• Busy periods

Once you have your revenue determined, you’ll want to review it every few weeks or every month. Updating your revenue and expenses will help you better manage your company’s finances.

Budgets will evolve over time and it’s important for you to revise your figures to account for major one-time expenses or changes in income.

Know Your Gross Margin

Budgeting small business expenses and revenue is only part of the equation. How much cash do you have left when you subtract your expenses from your revenue? This is your gross profit margin.

Growth profit margins allow you to know:

• How much money is left at the end of the year
• If you’ll have a cash shortfall
• If you’ll have a cash excess

Business growth requires a proper balancing of your finances. You can also review your gross margins to understand if you should be investing more heavily in your operations. Perhaps you have $100,000 left in cash at the end of the quarter that would be better utilized by investing the money in opening a new office or producing a new product.

You can figure out your gross margin by subtracting your total expenses from your total revenue.

Cash Flow of the Project

If you have a lot of projects rolling at one time, you may want to calculate the cash flow for each one. You can do this to learn if the project is one that you ought to continue with or not. An easy way to determine cash flow is to think of it this way:

• Customer payments for the project that are received
• Vendor payments that you need to make to complete parts of the project

If you subtract customer payments from vendor payments, this will be your project cash flow. You don’t need to add this data to your overall budget, but it’s not a bad idea to do it when you have multiple projects going on at the same time.

A major web developer may create a cash flow for each project they have within their overall budget so that they can better manage growth. You can also learn if the project will be profitable and sustainable for your company.

Factor Of Seasonal and Industry Trends

Budget planning for business must account for seasonal trends, too. Every business has trends that dictate the money that comes into a business during a specific time of year. For example, imagine apple farmers who sell apples during the fall.

These hardworking individuals may not make much money during the summer except for some of the goods that they sell, such as strawberries.

However, when fall rolls around, it is their busy season, and they may sell 300% more goods in a few short months than they do for the entire year. Every business has trends that cause its revenue to rise and fall.

Factoring in seasonal trends is one of the most important things you can do to improve the accuracy of your budget in the short term and long term.

The Role of Accounting Software in Budgeting

Business budgeting software helps you streamline your accounting in ways that manual methods can’t compete with. After all, manual methods are slower and more error-prone. A lot goes into your budget creation, including:

• Creating accurate cash flow projections
• Estimating your revenue over the accounting period
• Analyzing your business costs

You must collect a lot of data to create an accurate budget, including scouring your credits and debits across your business accounts. One oversight can cause your budget to be inaccurate, which is why using apps and software will allow you to reduce errors in your calculations.

Software will also empower you to access historical data about your business so that you can analyze trends that you may have otherwise overlooked.

Keeping all of your budget data in one central location will make it easier for you to review the figures and make decisions and projections. Financial reports can also be generated with the help of your software, so you know your:

• Expenses
• Income
• Profit margins
• More

An effective budget is one that allows you to take steps to grow your operation. However, the budget that you create is only as good as your diligence to follow it.

If you deviate from the budget, it will be ineffective.

Conclusion

Budgets are a lot of work to create the first time, but you’ll gain a lot of control over your business’s future after creating one. You'll learn how to properly allocate your money to different areas of the business, limit risk exposure and understand if you need to cut back on expenses.

Additionally, your budget will allow you to make better business decisions.

If you want to begin mastering your finances, you’ll also need to manage your cash flow properly. Estimating costs and projecting your cash flow empowers you to make smart, growth-oriented choices about your business’s future.

Click here to give Cash Flow Frog a try for yourself.