If you’re wondering why you need a budget for your business and how to create one, you’ve come to the right place. A budget is s roadmap that guides the future of your business revenues, expenses, and profits. Without a budget, it would be like driving a car knowing where you want to go but not knowing how to get there and not having any gauges to tell you how fast you were going.
A business budget is essential for planning how to reach your goals, understanding your potential, and measuring your success. A budget can not only help you keep your expenses on track, but also help monitor your expected versus actual revenues.
A balanced budget is when revenues equal expenses, which equals zero profits but also zero losses. When revenues exceed expenses this is known as a surplus or profits. When expenses exceed revenues this is known as a deficit or losses. As business owners, we always want to aim for a surplus or profits, but sometimes, especially if you’re just starting out, you will have losses and you’ll have to manage them effectively to move to profitability.
To create a budget, you can start by using your income and expense reports from your current and previous years. You will also need to do some research into your market and the overall economy to do some estimates which is called forecasting. You should look at what competitors are offering and compare pricing and value, as well as potential market demand and conditions to determine future sales and sales volumes. Make sure you take into account any pending contracts or proposals as well as any plans you may have for changes or increases in your business. You will need to estimate or forecast both revenues and expenses preferably for one year.
Next you will want to use an online template or spreadsheet software like Microsoft Excel or Google Sheets. It’s super easy to find ready-made templates online and just edit them to meet your needs. You can also create your budget on paper, but with all the free technology available, it’s so much faster to just use it. When you create your spreadsheet, make sure you leave at least one blank column next to the column where you put your estimates, so you can go back and review your budget against your actuals and record them to show your progress towards your goals.
When you fill in your spreadsheet and do your forecasting, you should estimate your profit margin first.
Target Profit Margin = Forecast Revenues – Forecast Expenses
You may have developed individual profit margins when you developed your products and services, however this target profit margin will be used to help you forecast your revenues and expenses for the year’s budget. You can then use your budget to refine the expected individual profit margins on your products and services, and adjust as needed. For example, if you determine that you need to have a target profit margin of 40%, and you have done your research and have forecast that your expected total revenues will be $50,000 for January, then you can compare this to your expected total expenses for January and see if that is realistic.
To determine your expected expenses, you need to consider your fixed costs, variable costs, and semi-variable costs.
Fixed costs = these are costs that do not vary as your sales and sales volume increase or decrease such as rent, insurance, and property taxes.
Variable costs = these are costs that vary directly with you sales and sales volume such as raw material and inventory.
Semi-variable costs = these are costs that may vary with your sales or sales volume such as employee related costs, fuel, utilities, internet, and phone.
Once you have all your expected revenues and expenses (costs) listed, then you will total all the expenses and subtract them from the totaled revenues…just like for your income and expense report.
Forecast Profit (or Loss) = Forecast Revenues – Forecast Expenses
Your Forecast Profit should be equal to your Target Profit Margin. If your Forecast Profit is less than your Target Profit Margin, you will either need to re-evaluate your forecast revenues or expenses, or both. You want to make sure you have a fairly realistic forecast, especially for your expenses. Your budget will be your dynamic tool for gauging your control over your expenses as well as meeting your expected revenue. It’s best to review your budget against your actuals monthly and make course corrections that create a positive impact towards meeting your goals.
Mahalo and much success,
Beesley, C. (2013, June 3). How to Build and Use a Business Budget That’s Useful All Year Long. Retrieved from SBA.com: https://www.sba.gov/blogs/how-build-and-use-business-budget-thats-useful-all-year-long
Benoit, J. (2009, May 14). How to Create a Simple Budget. Retrieved from Entrepreneur: http://www.entrepreneur.com/article/201670
How to Create a Business Budget. (2015). Retrieved from WikiHow: http://www.wikihow.com/Create-a-Business-Budget
How to Start a Busniess Budget. (2015). Retrieved from Inc.com: http://www.inc.com/encyclopedia/businessbudget.html