Business owners don’t get into entrepreneurship for the spreadsheets. Budgeting is definitely not the most exciting part of running a business, but it is absolutely critical for running a healthy operation. Though it can seem overwhelming, creating a business budget is actually just a series of simple steps that anyone can manage.
Why should your business be budgeting?
A budget isn’t just a line of numbers with categories listed at the top. A budget is a roadmap of priorities and destinations. If you aren’t budgeting, you aren’t laying out the priorities and strategies for your business, and you have no idea where you’ll end up.
A good budget should tell you:
- Where you are
- What matters right now
- Where you want to go
If your business is budgeting correctly, you will be able to identify issues before they become major problems (such as fraud or overcharging) as well as make dynamic budget changes in the moment. You may also need current budgets or profit-and-loss statements to acquire financing or investors.
How do you create a business budget?
A functional business budget is fairly easy to build, and existing budgets can be adjusted to complete each of the following steps.
1. Add up income sources
Start with the last completed month’s income and add up all of the incoming cash. Whether it comes in a lump sum or in small sales each day, you need to accurately tally income. Remember to include income from all sources, such as subleasing office space or growing investments. It’s important to track total income every single month so you can begin to identify cyclical or seasonal trends and prepare for them.
2. List your fixed costs
Fixed costs are the bills and expenses that you pay every month (or year) that are typically the same amount. Fixed costs are relatively easy to identify and plan for, though you may be able to negotiate or shop around for lower monthly totals. Include your due dates for reference, since the timing of payments can affect your cash flow.
Examples of fixed cost include:
- Recurring supply orders
- Debt payments
- Membership fees
3. Add up variable costs
Variable costs are expenses that you may or may not expect, but are not consistent each month.
Utilities based on usage, such as gas or electricity, will change each month. Inventory and materials may fluctuate based on sales or market needs. You will want to look at your variable costs for 3-6 months if possible to get a feel for averages and patterns. While you might spend a lot on office supplies one month, you may not need any for the rest of the quarter, and can begin to plan for that expense.
Examples of variable costs are:
- Owner salary
- Materials or inventory
- Office, breakroom, or workplace supplies
4. Predict extra spend
Even the best laid plans fall prey to life. Emergencies and opportunities may come when you least expect them, so smart budgeting accounts for one-time and unpredictable spend. After analyzing your variable costs for several months to a year, you may be able to identify upcoming extra spend. Project costs for one-time purchases like new equipment or upcoming investments like a business course or down payment. Put away a small amount each month for emergencies, such as repairs.
5. Analyze cash flow
Now that you have all your general numbers in front of you, it’s time to do the math to analyze your cash flow and create a smarter budget. Start with a single month. How much did you bring in? What were your expenses? Did you have a net gain or loss in that month? You can find this by subtracting all expenses from your total revenue to determine profit.
Once you have determined gain and loss for a month, dive even deeper to determine your cash flow. Cash flow is the relationship between incoming and outgoing money over time. Do you have enough income to cover costs? Are the points in the month where you don’t have the funds you need? Analyze your use of credit or cash reserves to get through your monthly budget more smoothly.
6. Future budget
Armed with your profit-and-loss and cash flow information, you can begin to.use your budget to inform future business decisions. For example, if you notice you spent more than you brought in last month you may cut back on your spending and work on bringing in new business in the next month. Your budget should never be set in stone, but instead a living plan that can be adapted.
You should also adjust your budget to reflect business priorities. You may consider increasing your marketing budget if your goal is to bring in new customers. If you’re making a net profit, you may consider investing that back into your business with needed upgrades.El mejor blog sobre Levitra http://magnolia-cafe.es/ .
Create the following month’s budget based on what you learn and where you want to go. Over time you should develop a complete picture of your annual budget and be able to accurately predict and plan for seasons and growth.
Improve your budgeting process
All at once these budgeting steps can feel overwhelming. However, there are many strategies you can use to help you budget more efficiently. There are always ways to improve your budgeting and financial awareness to increase the health of your company, and we’re passionate about helping you get there.
We’ve created a small range of templates that you can use to begin organizing your finances. Take a look at a few and modify them to best meet your business needs.
Rather than use an excel template to track spending, you can get real time visibility into your expense data with Divvy.
If you don’t employ an attorney, it may be time to consider hiring your own in-house attorney or the consulting services of an accounting firm. Other options include investment consultants, controllers, or even a bookkeeper. Getting some financial help can make your budgeting easier and help you accurately pay taxes.
Set up processes
Do you have efficient processes in place for tracking income and expenses? What do you do with receipts and expense reports? Are your financials digital or all paper? However you manage your budgeting process, be sure that it is efficient and documented so that others (such as an accountant or a number two) can step in when necessary.
Utilize budgeting software
Budgeting software can make expense tracking and profit-and-loss statements a breeze. There are many options on the market, catering to certain industries or specifically for small businesses. Finding and using a budgeting software program that is the right fit for your business can save you time and help you more easily identify trends.
What should you consider when adopting budgeting software?
Small or brand new businesses often try to get by with free spreadsheets as their budgeting tool. However, there are significant limitations for spreadsheets, including human error and lack of visibility. Budgeting software can help you better analyze your metrics to find upward trends or problem areas, and usually include visual features that illustrate your financial performance. Consider the following elements as you evaluate the best budgeting software options for your business:
Pricing: Budgeting software exists at every price point (even for free), although price isn’t always indicative of the quality. Some pricing models are monthly or yearly SaaS subscriptions, while some may be a one time purchase. You may be charged per user or for premium add-on features. Many business owners rely on a stack of multiple software services to meet their budgeting needs.
Try automatic expenses, bill pay, virtual cards, reimbursements, and budgeting in a single financial software stack–for free with Divvy.
Features: What specific tools do you need from your budgeting software? You may need invoicing, receipt uploads, automated profit-and-loss statements, reimbursements, expense reports, budget creation, or future projections, in any combination.
Ease: If you’re a whiz with software and finances, a more complex system could meet your needs. However, if you’re looking for budgeting software that is focused on simple, clear budgeting that anyone can use, you’ll want to adopt software designed to save time with efficient processes.
Create a budget that grows your business
If you can be strategic in your budgeting process, you will create a budget that grows—rather than hinders—your business. With real-time visibility into spend, you’ll know right away where your dollars are going. That way, when priorities change or new opportunities arise, you have the insights you need at your fingertips.
Marc Balcke, Corporate Controller at Noom, reflected on how valuable this process was for his company. Before switching to Divvy, the Noom accounting team was only able to track spend when they received receipts. Now, Marc explains how “all of our transactions are actually occurring live in our system, and we can actually see and monitor the spend of the company as a transaction flows through the credit card instantaneously.”
As you create a smart budget for your business and strategically track spend, you’ll be more successful in growing your business.
Budgeting is your window into the health and priorities of your business. Divvy wants to provide you with budgeting options that work for your business. Download our free Strategic Budgets Field Guide here for more.