Creating the right budget for your small business can help you gauge performance, prepare for taxes, explore growth opportunities, and achieve your short and long-term goals. Establishing an effective budgeting process also improves your chances of success by helping you anticipate future needs, spending, profits, and cash flow as well as identify and address potential problems.
Without a budget, a business runs the risk of spending more money than it is taking in or not spending enough money to be competitive. A budget will allow you to track cash, business expenses, and how much revenue you need to fund or expand operations and generate income for yourself.
While managing finances is not every small business owner’s strength, putting together a simple budget is a relatively painless process. With the new year just a few months away and the busy holiday season fast approaching, Summit Financial Resources has put together this quick budget guide for business owners who want to get a head start on planning for 2019.
Include the basics.
Drafting a budget is easiest if you created one the previous year. Those projections, coupled with the actual income and expense figures you realized, would form the basis of your estimates for the coming year.
For business owners who have never written a budget, the basics should include your revenues, costs, and profits or cash flow. Most yearly budgets are divided into 12 months and should have blank columns next to the estimates to fill in actual results as the year progresses. You may want to consult an accountant in preparing a budget, but you also can do it yourself by using small business financial software or free budget templates that are available online from SCORE and other organizations that support small businesses.
Develop sales and profit targets.
Developing a target for your sales revenues will drive the rest of your estimates for costs, expenses, and capital expenditures. For a startup business, begin by estimating what type of realistic profit you’d like to see in the coming year. You may have to make assumptions based on your geographical area, hours of operation, and by researching other local businesses.
If you have been in business for a while, take your company’s most recent financial statements and use those business trends as the basis for developing your sales and profit targets. Take into consideration factors that might affect your sales numbers, such as changes in the economy or the loss of a major customer. Some business owners create multiple budgets in order to be prepared for different scenarios.
Estimate your operating expenses.
When you know your expected expenses, you can budget accordingly. The goal is to determine your average weekly operating expenses. Create an itemized list of fixed and variable expenses, including salaries and wages, rent, supplies, travel, raw material, and taxes. Review expenses from previous years to help you set an accurate goal. If you’re just starting out, brainstorm with your team or colleagues to make sure you factor in all the costs you will incur.
After you’ve gathered this information, you can match your business revenue to your expenses. Pay close attention to your sales cycle. Many businesses experience busy and slow periods over the course of the year. If your business is seasonal, you’ll need to structure off-season expenses so they fit the revenue available.
Some major expenses occur unexpectedly, but planned expenses like property renovations, equipment purchases, or upgrading software systems can be carefully timed and budgeted for to avoid burdening your business financially. Make sure you have realistic expectations for your expenses and income, and avoid taking on too much too soon.
Determine your gross profit margin.
Gross profit margin is a profitability ratio that measures how much of every dollar of revenue is left over after paying the cost of goods sold. This information allows you to estimate whether you will have enough extra money to expand the business or will need to generate more sales to cover the cost of additional staff or product lines. Either way, it’s important to use realistic numbers so your budget becomes an effective tool for guiding your business.
Review and revise your budget as needed.
As your business changes and evolves, so will your budget. You may estimate that the business will generate a certain rate of revenue growth or that expenses can be controlled, but you will need to be prepared to make adjustments based on your actual growth and profit patterns. For instance, you might land a new client that doubles your business or a shift in the market may mean your sales figures are set too high.
Revisiting your budget regularly helps you maintain a clear picture of your business finances. This process is essential for small business owners who want to ensure that enough money is available to keep their operation up and running, cover emergencies, and compete effectively in the marketplace.
Many small business owners review their budgets quarterly and even monthly. As your budget needs fluctuate, this will allow you to make adjustments where needed. Some experts recommend taking inventory of your expenses each month and focusing on areas where you can save money by cutting costs without cutting quality.
Sometimes unexpected expenses can result in a cash flow shortage. Summit Financial Resources provides working capital financing programs that help small businesses stabilize their cash flow. For example, our core product, invoice factoring, allows you to harness the cash in your accounts receivable to cover shortages whenever they arise. This makes it a vital cash management strategy for even the most successful small businesses.
Financial issues for small businesses are often the result of a lack of monitoring or the small but steady expenditures that build over time. Setting a budget and sticking to it is an essential tool for ensuring your company’s slow and steady growth.
Working Capital Financing is a few clicks away.
Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.