When starting a business, the entrepreneur must think about the structure, the product or service, marketing and building presence, deepening their knowledge on the problem, and so on. One of the things one should get going right off-the-bat is the business’ finances. Don’t know where to start? Read this blog to learn the three essential steps of budgeting for your business without being a connoisseur of finance reports!
Here is a summarized example of a business’ budgeted income:
As you can see, at the beginning of this x time period, there was a projection of income– a goal of how much this business owner wanted, considering their resources available; an actual development of income- how much of that goal was actually made; and a difference calculation- positive or negative behavior of projection vis a vis actual development. This exercise will support you as a business owner to see where and by how much you exceeded/missed your goal. What’s more, this can also serve as a guide to make adjustments in the next step.
Some examples of fixed costs include: rent/mortgage payments, salaries, insurance, and depreciation of capital.
To look at both of these terms contextually, imagine you have a company that makes one product. Let’s say this product totals $5.00 in variable costs and your operation’s fixed costs are $8,000 a month. If you make and sell 300 units of your product, you will have $9,500.00 in expenses ( $1,500.00 in variable costs + $8,000.00 in fixed costs).
On the other hand, if you make and sell 0 units, you will still have to pay the $8,000.00 of fixed costs to keep your business running. Think about it, you still have to pay your employees whether you sell or not.
As the name suggests, one-time investments are costs that you will incur only once in a timeframe. These are costs that will vary widely from month to month; you may have no one-time investments one month and have five in the next. One-time investment examples can include an acquisition of a cash register, an annual subscription to a program or a new computer for the business.
Here is a Pro Tip: Only incur in one-time investments when it is absolutely necessary and if you still have money to spare. These could often be the reason you are incurring losses in your business.
No one likes to think anything will ever happen to them, but the harsh reality is that unexpected things will very likely happen to you and your business. This is because the world is unpredictable and ever-changing; laws, regulations, tendencies, the economy, and environmental factors are all things to consider that we cannot predict easily or at all.
It is now time to see if you are making or losing money in your business (really). This is a very nerve-wracking part of the process, which is why we recommend keeping your feet on the ground.
This is a very simple calculation: you need to subtract your total expenses from your total revenue to determine how much you have gained or lost.
If you are making a profit– Awesome! You are on the right track. However, depending on how much profit is being made, you can adjust and redistribute your budget.
You have just learned the three basic steps to business budgeting! Consider your incomes minus your expenses to see how much you are winning or losing. How do you monitor your finances? Did you enjoy our financial blog? Let us know in the comments below!
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