Do you know where every dollar of your business goes? Business owners who don’t have a budget, likely don’t know.
A budget is the road map of your business – it tells you where you’re going with the business & what’s needed to get there.
Budgeting 101: before you can make money, you need to know how to spend it. A budget allows businesses to track cash on hand, operating expenses, and now much revenue you need to grow (or to keep the lights on). By committing these numbers to paper, you are more prepared and increase your changes of success. It enables you to anticipate future needs, and to be flexible when unplanned expenses or revenue shortfalls occur. By having a budget in place, you take a proactive stance on your business, not a reactionary one.
According to the U.S. Small Business Administration, a budget can be used to indicate some of the following:
- The funds needed for labor and/or materials.
- For a new business, total start-up costs.
- Your costs of operations.
- The revenues necessary to support the business.
- A realistic estimate of expected profits.
Components of a Budget
A budget should, at the very least, be comprised of your business’ revenue, expenses, profits, and cash flow. This allows you to know how much cash you have for capital investments, such as tools, equipment, facilities, etc. The SBA defines the basic budgeting components as:
- Sales and other revenues – best basis for this is your last 12-month trend of sales, plus any anticipated future growth
- Total costs and expenses – broken down between fixed (i.e. rent) and variable (i.e. raw materials)
- Profits – Subtract your costs from your revenues
Creating the Budget
There are many free online tools that can help you get organized and get started. If you are overwhelmed by the idea of doing it on your own, consult your CPA or any local consulting resources. The hardest part is creating your first budget, since you’re starting from scratch. Once you have one, updating it each year is much easier to do. So, a vendor can get you started, and then you take it from there. Good luck!