During the coronavirus pandemic and financial crisis, budgeting is an even more important tool to keep you operating or to help you rebuild. But even in the best of times, entrepreneurs may find it intimidating to handle a budget and are unfamiliar with budget forecasting, tracking expenses, or making mid-year adjustments.
A budget takes a bit of time to set up and calculate but should be a “living document”, adjusted to fit your business. It should evolve as market conditions, income, and debt obligations change
Read on for comprehensive information you need to know and avoid learning tough lessons by trial and error. Here are best practices that can help you learn how to manage and stick to your business budget.
What is a small business budget?
A budget is an estimation of revenue and expenses over a specific period of time. It’s basically a financial plan for a defined period, normally a year. Small business owners use a budget as a tool to plan and control the use of resources.
A small business budget should:
- Show sales you need to cover your business costs
- Determine how much you can put back into your business
- Reveal when you can hire additional staff
How to create a budget
These steps can help you create a workable budget to keep your business moving forward.
- Gather historical information
Look at three to four years of historical data. These numbers will show seasonal revenue and expense fluctuations.
- Estimate sales and set profit goals
No one can predict revenue flawlessly. To estimate sales and set profits, make connections between sales and expenses. Look at past patterns to come up with a reasonable estimate. If your records are organized well, you’ll have an easier time.
- Determine fixed and variable costs
Fixed costs can include rent payments, utilities, inventory costs, and payroll. Variable costs may include utilities, inventory costs and travel expenses.
- Calculate your profit margin
Profit margin is a profitability ratio calculated as net income divided by revenue, or net profits divided by sales. For a comprehensive description of this ratio, visit Investopedia. You’ll learn the important components and how to calculate your business profit margin.
Tips to help manage a budget
1. Sign up for financing and budgeting courses
Starting a business involves a huge learning curve. Whether you have an MBA or you’ve never taken a business course, there is an online class, workshop, or podcast that can help.
The best online business courses teach new skills to help you grow as an entrepreneur.
2. Manage your department budget like it's your own
For a personal budget, you might need to make sure you have enough money to cover your living expenses like food, mortgage payment, and utilities. Take this strategy and apply it to your business budget to keep your business operating. You’ll also need to pay your rent and utilities, pay your staff, insurance costs, for your business. If you take out a business loan, then you need a plan to pay it back. It’s crucial to stay on top of your expenses and protect your credit scores.
3. Track monthly expenses and make corrections
When starting a new business, it’s understandable to want to do everything right away and all at one time. However, starting and scaling your business takes time and money. To avoid overspending, have a clear goal of what you want to achieve and outline what the goal will cost you.
The SBA suggests that if your budget is going to work for you, you should plan on revisiting it on a monthly basis. You may discover indicators that you need to adjust your budget to stay profitable. Your expenses, staffing needs and inventory purchases might need to be tweaked.
4. Be strategic
Strategic planning consists of documenting and establishing a direction of your small business. Assess both where you are and where you're going while separating wants from needs. Do this by taking a global look at your short and long-term goals. Your strategic plan gives you a place to record your mission, vision, and values, as well as your long-term goals and the action plans to reach them.
5. Make use of technology
Budgeting software can be used by business owners for accounting and other financial tasks. This type of cloud-based system ranges from simple single-entry apps for check writing and bookkeeping to advanced double-entry platforms that offer sophisticated tools. There are plenty of free options available with numerous online reviews from real users. If you need guidance, a financial professional can help you determine the best fit for your needs.
To get you started, choose a good template to organize your finances. Small Business Budget Templates for Download.
6. Involve your team
Transparency helps your employees feel included. Employees are a great source of input and can suggest budget tweaks to help increase performance. Involving your team and explaining your businesses’ budgeting process results in a sense of ownership and encourages employees across all departments to find creative ways to manage expenses.
7. Cut down on unnecessary expenses
Analyze your business expenses. If a cost isn't providing an ROI, cut back or completely eliminate that expense. Your strategies for cutting back on expenses can be working remotely, eliminating unnecessary perks, cutting business travel, and negotiating with vendors for lower prices or longer payback terms. Remember to consider seasonal business and where you can cut during busy times.
Getting on track and getting used to your budget can take some time and adjustment. Take a look at your business plan and see if your budget has affected your goals. If you’re struggling to operate under your new budget, reach out for help from a business mentor or financial professional.