How to Create a Budget for Your Small Business
When a large corporation blows its budget, there’s typically cash reserves or access to liquidity to help dig it out of trouble. But small businesses operate on such tight profit margins that overspending can be death sentence. That’s why one of the most important things you can learn early in your entrepreneurial career is how to create a budget.
If you continuously spend more than what you bring in, your business will eventually go broke. Budgeting helps you plan for costs and expenses, and quantify how much you’ll make and when that money should arrive. Importantly, budgeting isn’t just a way to project how your business should operate – it can also be an early warning system of sorts that shows potential hurdles months in advance. And knowing about these hurdles can help you pivot before theoretical problems become real ones.
The following are some simple steps for creating a budget, and how to stick to it.
How to Create a Small Business Budget
Create definitions/assumptions: Before you start calculating anything, you need to figure out what exactly you’re going to calculate. You need to determine what constitutes as …
- Fixed expenses – Unchanging expenses that you can rely on to stay constant month after month, such as rent.
- Variable expenses – This can be anything from raw materials to wages. While you can anticipate a certain level for these, they’re also adjustable depending on how much you ramp your business up or down.
- Income – What do you do that actually brings in money.
If your business has already been in operation for a few months or longer, you can use what data you have to better educate your budget. If you’re just starting up, there’ll be a lot more estimating; try to research expenses and income for similar businesses and make the best educated guesses you can.
The upside? While you want to stick to a budget, they can be somewhat fluid as you gain additional information and get a better idea of how your business operates.
Revisit your budget every month: Keep detailed records of all transactions, expenses and revenues, and at the end of each month, create a report that compares the actual results with your estimates. Were you close? Were you miles away? If your budget was off, why? Was it because you underestimated variable expenses, or did one-time costs take you off the path?
Depending on the nature of the beast, you may need to re-evaluate and even recalculate your budget for the rest of the year.
Adjust: If your budget is significantly off – whether you fell far shy or brought in much more than expected – you may need to actually tweak the way you’re operating your business. That could mean changing staffing or looking for new materials vendors. And even if your budget is in line, you should always look for ways to improve your situation. Are there ways to save on costs? Is your lease prohibitively expensive for office space you’re not in love with? Be faithful to your budget, but understand that it’s not written in stone.
If the idea of creating a budget seems too overwhelming to take on by yourself, or you just want to ensure that you get it right, take a few minutes to call the small-business specialists at McManamon & Co. We offer a wide range of consulting services covering everything from budget planning to recruiting a bank to strategy sessions.
Let us help you start drawing out your financial roadmap. Call McManamon & Co. at 440.892.9088 or contact us online to get your budget in place.
Tags: budget, McManamon, small business | Posted in McManamon & Co., small business