In order to make money, businesses need to first know how to spend it. For first-time entrepreneurs who are planning to start a business venture, it’s crucial to create a business budget to ensure long-term success.
A common mistake small businesses make is starting without a financial plan in mind. Going with the flow isn’t such a smart move. Preparing a budget, in fact, helps a business avoid debt, be more profitable, and be more prepared for the future.
Breaking Down the Key Budget Components
Here is a breakdown of what makes up a business’s budget, which includes revenues, costs, and cash flow. Ideally, a business should tabulate its budget annually. According to the US Small Business Administration, these are the basic budgeting components that small businesses should look into:
- Sales and revenues—small businesses should estimate their projected sales revenues and include those in their budget plan. Those just starting out need to do market research within their industry to know roughly how much they’ll likely to earn.
- Costs and expenses—the next step is to come up with figures for how much it will cost a business to gain those revenues. These can be divided into fixed, variable, and semivariable costs. Fixed costs include insurance, variable costs include the inventory, and semivariable costs include salaries and advertising.
- Profit—here comes your favorite part. Profit can be estimated by subtracting the total costs from sales and revenues. Having profit estimates helps businesses gauge whether they can invest more in other areas of the business or they need to cut down their projected costs.
Choosing a Good Budget Format
Entrepreneurs who are just looking to launch their first start-up may have no idea how they get started with their financial plan. Basically, a budget spreadsheet is made up of two assumptions: which goods are being sold at their specific prices and which areas cover a huge chunk of the expenses—for example, marketing campaigns or staff salaries.
There are two financial formats small businesses can use: a cash flow statement and an income statement. For a new business, just a cash flow statement would suffice. This will help them gauge how much revenue is needed to cover both costs and profit projections. It also helps them prepare a safety net budget in case of cash shortfalls in the future.
Budgeting Tips to Apply Before Launching a Biz
Prepare a General Road Map
Start by listing down all your revenue sources. There won’t be many references for businesses that are just starting out, but a good 12 months’ worth of information is already useful. It helps them see revenue changes over time and determine seasonal patterns.
Next, list down fixed costs, which may include the following:
- Debt repayment
The total costs for these areas will then be subtracted from a business’s total income.
Next come the variable expenses, which include the following:
- Owner’s salary
- Office supplies
- Replacing old equipment
- Staff training
- Marketing campaigns
Businesses may have to lower variable expenses during slow months. When there’s extra income, it’s best to invest in these expenses to benefit the company in the long run.
Find Other Streams of Income
Around 20 percent of start-ups fail within the first 12 months—and one of the most common reasons is being rigid when it comes to their business strategy. For example, the unprecedented pandemic has closed down physical stores all around the globe. Yet at the same time, it has opened a window for businesses to continue their operations by selling their goods online.
Whether businesses are starting an e-commerce store or plan to set up a physical location in the safer future, selling their products or services on online marketplaces, like Shopify, helps widen their reach and increase their sales.
Use a Software or Hire a Professional
Depending on the size of the business, a budget may be written on a notebook, but it’s best to make use of technology for more accuracy. There are plenty of useful business budgeting tools out there that will help businesses organize and plan their finances. For those who aren’t confident with their budgeting skills, it’s best to enlist the help of an accountant or a financial adviser.
Budgeting isn’t extra work when launching a business. It’s a nonnegotiable step. It won’t only help entrepreneurs stay on top of their business but will also help them visualize the future and plan for it.
It’s best to note that these budget assumptions are merely assumptions—they may or may not happen in actuality, and that’s okay. What matters is that businesses are keen on making improvements to reach success.