How to Create a Business Budget in Six Simple Steps
While an essential part of operations, business budgets are often highlighted as one of the least favorite tasks on corporate to-do lists. A business budget will help your company run more efficiently, keep tabs on profit and loss, utilize trends to predict seasonal business periods that are likely to be slow, understand where your money is going, and to forecast and plan for the future
By creating and managing a budget, you will have insight into how your money is being spent and if it is going to the right place. It is also a great way to help you stay out of debt.
In this post you will learn all the details on how to create a business budget for your unique situation, including the categories to use, six steps to creating your own business budget template, and tips.
What is a Business Budget
A business budget plans for income and expenses over a period of time, typically a year. As the financial plan for your business, it is used to assist with operational efficiency and to allocate resources appropriately based on business objectives. It can be extremely useful for goal setting, business planning, and ensuring that there are funds on-hand for unexpected costs.
Why You Need It
If you don’t know what income to expect, then how will you know what expenses you can afford or create an accurate operating plan for your business? Your budget is an essential tool in your arsenal as it allows you to plan spending, analyze where your money is going, and adjust your operating plan based on the needs of your organization and future growth goals.
What Makes a Good Budget: The Categories
We believe that the most successful budgets are simple, flexible, and insightful to your business needs. It is important to include the following elements:
Estimated revenue is the amount you plan to make from the goods or services that you offer. In short, it’s the income you expect to make in the next year and can be based on numbers from the previous year, or, if you’re a startup, based on industry trends and averages.
Fixed costs are your regular expenses such as rent, equipment leasing, and insurance. These costs are also referred to as overhead and rarely change month-over-month.
Variable costs change based on production needs and sales volume. They include cost of goods sold, raw materials inventory, fees associated with production, shipping costs, commission for sales, and business travel.
There are also semi-variable costs such as employee overtime, expenses related to equipment and work vehicles, and certain professional services. It is important to be mindful of variable expenses as they are areas where you can likely tighten the purse strings if you hit a few bumps in the business road.
One-off expenses are costs you incur that are outside of your norm and are expected to be an isolated incident. A few examples include moving costs for changing offices, furniture, and startup costs. When planning your budget, brainstorm with cross-functional teams on any potential one-off costs they anticipate occurring in the year ahead and make a note on your calendar or in your budget spreadsheet.
The money going in and out of your business on a monthly basis is referred to as cash flow. Income sources like revenue from customers and clients is the money flowing into your business, while total costs of what is being spent on expenses is flowing out. Cash flow needs to be monitored closely as it tells you if you are in the positive or negative. If you have more money flowing in than flowing out, then you are in a positive cash flow scenario. If more cash is going out than in, then you may need to retool your budget to adjust your bottom line. This is especially important for small businesses as running out of cash can lead to closing up shop.
Profit! One of the top goals of any business is to turn a profit. Profits are what is remaining once expenses are subtracted from revenue. The more that is left over, the higher your profit margin. In this section of your budget, plan for the amount of profit you anticipate making based on estimated expenses and monthly income.
Last but certainly not least, consider adding a summary section to your budget. This will offer a snapshot of each budget category and can serve as a quick bookkeeping resource to grab financial information. We recommend integrating the totals on the summary page with other tabs on the budget tracker so that figures automatically update across your budget. By doing so, you will reduce human error and improve accuracy.
The Six Easy Steps to Create a Business Budget
While creating a business budget may seem like a daunting task, this step-by-step guide should help make budget planning as easy as possible. Please note that you will need to roll-up your sleeves and dig into data, or research baseline costs within your industry (if you are a startup).
Step 1: Review Your Revenue
To get started in making your business budget, you first need to conduct a retrospective review of your existing business and sources of income. The goal of this step is to determine what revenue comes into your business each month. Please note this is not about determining profit, we are purely figuring your revenue.
At minimum, we suggest you look at least 12 months, or the last year, of data or more if possible. We have a feeling you will notice some trends such as increased revenues during the holidays (depending on your line of business), or booms during the summer if your business is tourism-based. By understanding these revenue trends, you will be able to prepare for the months when your revenue isn’t typically as high.
Step 2: Calculate and Subtract Operating Costs
Your operating costs, or fixed costs, are any expenses that are necessary on a recurring basis for your business to run. Fixed costs can be annual, monthly, or even weekly. This expense category can include things like taxes, insurance, payroll, loan repayment, and rent.
Be sure to look carefully at your business expenses so you do not miss any fixed expenses. Once everything is tallied, you will subtract that number from your revenue.
Step 3: Figure Out Your Variable Expenses
In addition to fixed costs, you will also need to work out your variable expenses. Variable expenses are those that fluctuate based on usage such as utility bills, office supplies, and marketing costs.
It’s important to document your variable expenses so that you know where to cut spending in months where income is light, but also to know where to boost expenses as you plan for the future of your business–marketing spend, as an example.
Step 4: Allocate Money for the Unexpected
Expecting the unexpected rings true in so many facets of life, with business being no exception. However inconvenient the expense, the show must go on and both you and your budget need to be prepared. Some instances that may require you to tap into your emergency fund include a company vehicle or equipment breaking down, the need to replace an expensive piece of machinery, global disasters like the COVID-19 pandemic, or an unexpected business trip with expensive, last-minute rates.
Step 5: Generate Your Profit and Loss Statement
A profit and loss statement, or P&L, is a summary of your revenues, costs, and expenses of a specific period of time such as a quarter or fiscal year. This financial statement requires you to deduct your expenses from your income. If the number is positive, congrats, you’re turning a profit! If it is negative, then you are in the red and taking a loss–which is okay–but something to work on as you calculate your budget and figure out the next steps for your business.
Step 6: Plan Your Business Budget with the Future in Mind
It’s now time to put together your business budget. Your P&L statement documents past business, while your budget is all about the future of your company. Please keep in mind that you should reference your profit and loss frequently as you pull your budget together since it shows trends from the past, including:
- Potential staffing needs throughout the year
- Seasonal business ebbs and flows of income
- The impact of weather such as blizzards or hurricanes
- Higher-than-expected profits
By reviewing your business data, you’ll gain a deeper understanding of what to anticipate and forecast for the future.
Business Budgets for Different Types of Companies & Situations
Not every budget situation applies to every organization. Sure, the basic framework is the same; however, small businesses, retailers, and startups, for example will all have different budget needs and scenarios to consider.
For a small business
Every dollar counts for a small business budget–especially in the early years. As a small business owner, review your budget and cashflow, keep tabs on trends related to seasons and calendars so that you are prepared to cut costs as needed for months with leaner actual income.
For a business plan
If you are pulling together a concept and go-to-market plan for a new business, a budget will be a must. You will need to know costs required to get the business up-and-running and also do industry research to create revenue projections once you open your doors. The more detail and research the better, especially if you will need a business loan or investors.
For a startup business
In a typical startup scenario every penny counts and needs to be accounted for, ranging from rent to purchasing your company website to office furniture and beyond. We suggest that you set a budget goal and then work through the various expenses and startup costs to get your company off the ground. Include a necessity column and categorize each expense as essential, non-essential, or later. Remember that business loans will need to be repaid, and if you are funding through your own savings, it’s essential to leave a cushion for emergencies. Also be cognizant of what can be written off on your taxes. The IRS will allow you to deduct certain startup and organizational costs, making it essential to accurately track and document expenses.
For a retail business
Retail businesses are a unique scenario. In addition to the normal budget categories we’ve touched on above, retailers also need to coordinate inventory needs and payment terms to suppliers. From an operations perspective, it is important to get a baseline on how quickly your products will sell and how often they will need to be replaced to account for purchasing and keeping shelves or racks stocked.
For business travel
If your organization spends a good portion of its budget on business travel, it is necessary to have a corporate travel policy that outlines expense allowances, reporting requirements, and the dos and don’ts of spending company money. Further, an all-in-one travel and expense management platform is the best choice for your organization as it will provide a one-stop-shop for everyone on your team, automate processes, and even build policies into the technology.
Budgeting Using Popular Accounting Software
Microsoft Excel is one of the most popular tools for business budgeting that is on the market today. Excel has a number of tools specifically designed for business budgets and there are a plethora of templates available. However, it does not have a comprehensive budget forecasting tool, and typically involves the need for sensitive formulas and manual entry of tons of data. Both of which can lead to errors.
Compared to Excel, Quickbooks is a far more robust system for business budgets that will allow you to review budget vs. actuals reports, shift views between annual and monthly, set-up alerts on account thresholds and due dates, and automatically pull in data related to check runs. Accurate data entry is a must, but Quickbooks won’t require you to be a master formula builder and fixer.
As you get started with creating or revamping your budget, keep in mind that there are templates available that can help get you started. A business budget is a document that should be updated and referenced frequently, so you want to ensure that it is easy to use and up-to-date.
A good budget can have a huge impact on your business operations and help your organization run more smoothly and have increased profit margins. Here are a few tips to keep in mind as you get started:
Tip #1: Know your industry and trends that will impact your business. Whether this is seasonal, supply-chain, or otherwise, it’s essential to know when you will have trouble sourcing inventory or should expect reduced revenues.
Tip #2: Build-in savings. Emergency expenses can cripple a small business. Include savings allocations in your financial plan and stick to it. You don’t want to be in a cash-flow bind over essential equipment repairs and find yourself struggling to make payroll.
Tip #3: Know your inventory needs and vendor payment terms. This is harder to track out of the gate, but as your business matures, you should have a better understanding of how long it takes your inventory to “turn over” and incorporate this into vendor pay cycles.
Tip #4: Expenses should be no more than 30% of your revenue, as highlighted in Profit First by Michael Michalowicz.
Tip #5: Make a budget that is comprehensive, simple, and flexible. Anything overly complex or too rigid will be thrown to the wayside.
An accurate budget is a critical component of the financial success of your company. At minimum, you’re aiming for your income to exceed your expenses, with the goal of profit and growth. Try to abide by the maxim that if you budget for a problem, the emergency never comes up. However, if an emergency does arise? If it’s in your budget, it’s not such an emergency after all.
Need to control spend with a better solution? TravelBank allows you to manage expense, travel, and corporate cards in one intuitive platform, at half the price of competitors. Get in touch with a member of the TravelBank team today to learn more.