3 Easy Steps to Make Your Business Budget

May 4, 2022 – Ariadna Quiles 

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!

What is a Budget and Why Should You Bother?

We have all heard someone tell us to “manage our finances,” or “make a budget.” Nevertheless, few know the importance and value added of having a budget written down and sticking to it. For starters, a budget is a plan that tells you what to spend your earnings on during a specific period of time. You can strive to have weekly, monthly, quarterly, biannual, or annual budgets for your business (or yourself). In other words, budgets are live documents that you can adapt to your needs as you see fit.
Budgets are a must in business development. Budgets keep us on our feet and in the loop with the way we should manage our finances. This is because budgets give us a big-picture-view of where we are spending, how much, and the importance of our investments. In the end, this lets us make smarter financial decisions, gives you insight of where to adjust, and gives you a base to grow.

Steps in Creating a Budget

1. Write Down Your Revenue Streams

As a small business owner, you need to be aware of how much money is coming in and where that money is coming from, which is why the completion of this step ensures success in budgeting! Additionally, you may have multiple revenue streams, which can be hard to keep track of if you do not keep them documented. For instance, revenue streams may include but are not limited to: sales, loans, donations, investments made to you, and In-App advertising (if your business involves an app or a website).
Without a doubt, keeping a system on income tracking will get you a long way. You can keep invoices in files, or keep track of input of cash through receipts, accounting systems, or even Excel as we talk about in this blog.
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.

2. Consider your Expenses

Every business has expenses, and documenting every single one of them will help you have an accurate look at how profitable your business really is. For instance, let’s look at the different kinds of expenses you will encounter in your business budget.

A. Fixed Costs

Fixed costs, often known as indirect costs, are expenses that fulfill the following criteria:
1) do not increase or decrease through a period of time, and
2) no matter how much or little volume you do in your business, you still have to pay the same amount.
Some examples of fixed costs include: rent/mortgage payments, salaries, insurance, and depreciation of capital.

B. Variable Costs

Variable costs, also known as direct costs, are expenses that can increase or decrease depending on the volume of work you output in your business. Common examples include: labor costs, materials costs, packaging, shipping, and gas.
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.

B. Variable Costs

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.

C. Let’s Talk Emergencies

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.
Due to the uncertainties of the world, finance and accounting professionals recommend keeping at least 10% of your annual revenue in an emergency fund. At the same time, making consistent, automatic deposits into an emergency fund every month will help you stay afloat in the future if anything goes wrong.

3. Calculate Earnings Before Interests & Taxes (EBIT) / Loss

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.

“I’m Losing Money! What Should I do?”

If you ever come to realize that you are losing money in your business, try to keep calm. Most startups are not very profitable in the first few months or years. However, if this is not your case, to your advantage, this could be a solvable problem. In any case, this can be best assessed through a consultation with a finance professional. Therefore, we encourage you to schedule an appointment with a trusted finance consultant as soon as possible. Additionally, you will see that the exercise of having a budget and expense report ready for your financial advisor, will be very beneficial in the long run.

Keep your wallet low and head high!

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!

Be the first to comment on 3 Easy Steps to Make Your Business Budget

Leave A Comment

Share This Post!