Creating and managing a business budget may seem like a hassle, but any smart business owner knows it’s a key component of long-term success.[cite::219::cite] A budget will help you figure out how much money you have, how much you’re spending, and where you need to improve.
In addition, a budget can showcase the financial health of your business, when it comes to getting investors or applying for a loan from a bank. It can help you minimize risk, reach your goals, and give you peace of mind.
Who doesn’t want all of those things? Let’s dive in. Here’s how to create and manage your business in four simple steps:
1. Add Up Your Total Income
Do you know all of the income sources generated by your business? Make a list of the various ways your business makes money, and total them.
- Product Sales
- Services Rendered
- Investments
- Loans
- Other Sources
Now that you know the various sources of income your business produces, you can assign a percentage of impact for each one. Does most of your income come from product sales or service rendered? Maybe you have a large portion of revenue coming from investments. Remember that a balanced mix of income sources is best for your long-term stability and financial security.
Review past statements and financial reports to make sure you don’t forget anything.
Knowing your income totals will help you determine what areas of revenue are working so you can continue making sales, or what areas can be improved.
2. Know Your Operating Expenses
There are three main types of business expenses:
- Fixed - Fixed expenses are things like rent, utilities, accounting or legal services, insurance, and others, where the cost stays the same every month. Fixed business expenses are usually much easier to budget since the amount doesn’t fluctuate much, if at all.
- Variable - Variable costs are operating expenses like raw materials, office supply expenses, and transportation costs. They are usually different from month-to-month, which makes them harder to budget since the amount is always changing.
- One-Time Costs - One-time business expenses can include costs for new equipment, furniture, software, or even emergency repairs.
Don’t forget about quarterly and annual expenses! To get an accurate picture of your business costs, you need to include every expense your business pays for throughout the year.
3. Tally Your Profits
Once you’ve added up your sources of income from the business, as well as your operating expenses, you can tally your total profits. Your profit is the difference between what your business earns and spends. You’ll take your income minus all business expenses to find your total profit.
It’s important to note that this could be a positive or negative number, depending on where you are with your business venture. Calculating your profit on a regular basis will help you manage your business budget effectively. You’ll be able to see whether or not you need to make more sales, reduce operating expenses, or make other adjustments to income or expenses.
4. Adjust for Future Changes
Creating a business budget is not a set-and-forget task. As your business grows and changes, so will your budget. To maintain a healthy business budget, it’s important to review and adjust for future changes.
A good rule-of-thumb is to evaluate your financial reports and business budget on a quarterly basis. Use this quarterly evaluation time for reviewing past transactions and projects, as well as estimating future profits and expenses. This will ensure you’re on top of the trajectory of your business and can make adjustments for long-term planning.
Summing It Up
Learning to create and manage a business budget will take some time, but it’s a vital component that can’t be forgotten. It will allow you to make conscious decisions, so you can stay on track for successful growth. Use the steps detailed above to get yourself on track, and take charge of your business's budget.