Your small business budget captures the numbers that matter most to keeping your business up and running: revenue and expenditures. Managing and regularly revising your budget can do much more than just track spending. It can yield important insights into how your business is performing, whether there is room to trim spending, and overall company scalability.
Money management is a critical skill to have as an entrepreneur. Keeping your finances in check and planning ahead can help your small business thrive, today and far into the future. It is also important to create a revision schedule that allows you to maximize income over time Use this guide to master small business budget management.
Benefits of Having a Business Budget
Why take the time and energy to hammer out a small business budget? It can prevent you from going into the red by spending money you don’t have. It enables you to set monthly revenue goals and control cash flow. Sticking to a budget will leave enough room each month to pay your bills and business debts. Budgeting can bring many other benefits to business as well:
- Project overhead costs so you can accurately set your prices
- Compare your prices to competitors and make changes to the budget as necessary
- Adapt to changing conditions, such as slow sales months
- Allocate resources to certain projects
- Monitor your business’s overall performance
- Predict and prevent problems before they occur
- Set goals and encourage staff motivation
- Plan for the future
Managing your money is a key to business success. You need to have open visibility into the resources available to your business to remain profitable. Managing a budget gives you a roadmap to track where your company is going. Your budget does not have to be complicated. You simply need to include the right numbers to keep track of what’s coming in and what’s going out.
What to Include in Your Small Business Budget
Creating a small business budget starts with identifying a few key numbers; mainly, your revenues, expenditures, and profits or cash flow. First, estimate your projected sales for the budget period. Most small businesses plan budgets annually, but you can assign whatever period makes you comfortable. Then, identify the direct costs associated with your sales. This may include the costs of materials and manufacturing. Next, identify fixed costs (overhead costs), such as:
- Rent or mortgage payments
- Costs of staffing (don’t forget to include yourself)
- Vehicle expenses
- Equipment costs
- Printing costs
- Marketing expenses
- Professional costs, such as insurance
If this isn’t your first business budget, analyze your past budget. What were your successes? Failures? How was your performance last year, and how does it align with your targets for this year? Use last year’s figures as a guide, but factor in your current sales plans and business environment. Draw up your budget as realistically as possible. Your budget should let you easily monitor costs, expenses, working capital, sales, and other key numbers.
Use Your Budget to Measure Small Business Performance
A strong, carefully calculated budget gives you a guidelines on which to base future financial plans. It lets you realistically estimate future sales, set limits for expenses, and ultimately evaluate business performance. The difference between your income and expenses gives you a critical insight into how your company is doing. The larger that number, the more profitable your business. If that number starts to shrink, assess what your company could be doing differently to save money. During high points, put money aside to cover the slow seasons. That will keep your business stable year-round.
Managing Your Budget
Once you’ve created your small business budget worksheet, manage your budget by keeping an eye on it regularly. Updated it as needed, and check in on your income vs. expenses regularly. Identify places you may be able to trim expenses, such as office costs, or invest more money into projects that will grow your business during a profitable period. If you do not have the time to dedicate to your budget, hire a dedicated accountant to do so for you. Keeping track of your budget through tight management is critical for the future health of your company.
Why You Should Review Your Budget Often
It is not enough to set your budget and forget it. Your small business budget is something you must review often for optimal financial planning. Evaluating your budget – and your performance through your budget – gives you the information you need to adjust areas of business to improve the way you do things. Your budget can help you find motivation to improve customer service or communication with suppliers, for example. Reviewing your budget often gives you the power to conquer many aspects of business, such as:
Greater ability to plan.
You cannot plan for the future if you are in the dark about how much money you will have at that time. Without budget reviews, you could be headed toward bankruptcy and not even know it. Regular reviews put the power in your hands to map out your budget, avoid disasters, and predict the future of your company.
Transparency with goals.
Keeping up with a budget lets you and your staff see how far away you are from your sales goals. This lets you map out benchmarks and motivate employees to reach certain numbers each period, and ultimately make more money.
Visibility into unnecessary expenditures.
Your small business might have needed a service when you first started, but now you may realize it is an unnecessary expense. Reviewing your budget often gives you opportunities to eliminate expenses, save money, and increase your bottom line.
Effective cash flow management.
Using an up-to-date budget helps you successfully manage your business’s cash flow. You and your team can identify what goals you need to hit for the next budgeting period and what you need to do to make them a reality.
Reviewing your budget gives you the power to be flexible with your expenses and make changes to achieve greater profitability. Keeping track of how your company is faring lets you play with different strategies in each budget period. Then, you can stick with the one that works the best.
Reviewing your small business budget lets you decide whether it’s time to make some revisions. Revising your budget as your business grows, shrinks, or changes gives you the ability to achieve your objectives. In fact, many experts suggest revising your budget monthly. Keeping a close eye on your budget lets you control spending, stay realistic about your company, and plan for the future.
How to Revise a Small Business Budget
Don’t wait until debt swamps your company to make necessary budget cuts. Instead, review and revise your budget often to stay in control of your company’s profitability. Set aside time to revise your finances at every monthly or quarterly business review. If you experience cash flow changes, you should also revise your budget. Once it’s time to make a few revisions, get the whole team involved. If you have multiple departments, a head from each should be in on the budget revisions.
Revise your budget according to the needs of short-term projects and long-term goals. If you recently debuted a new product or service, revise your budget until you have actual numbers for manufacturing costs and sales income. Make allowances for single events, such as a major problem with defective products. Revising for allowances can help your company avoid bankruptcy if an unexpected problem occurs. These types of revisions can keep your company healthy no matter what comes your way.
Budget revision is not a one-time thing. It is an ongoing process. Your small business is dynamic. It needs a flexible, transparent, and up-to-date budget to stay on top. Revising your budget regularly is part of smart money management. If you need professional help with creating, managing, reviewing, and revising a small business budget, partner with the experts at Diversified Management Services, Inc. We can help you follow a business plan and set up important accounting processes, to help you achieve your short- and long-term goals. Contact us today to start with a customized business plan.