Here are some tips for creating a budget, or getting a handle on an existing one, so you can better maintain and grow your business:
Benefits of a Budget
The danger in operating without a budget is that it leaves you at risk of spending more money than your business brings in. Without a budget, you also may not have a good grasp on how much revenue your business produces each month. This can leave you hesitant to spend money on growth opportunities available to your business.
Furthermore, if you are thinking of applying for business financing, your lender will likely want to see a budget included with your company’s financial statements. The same goes for expanding your business, attracting investors, and even preparing your taxes.
You will first need to gather any bills to know what you currently spend on your business each month. Depending on your industry and business needs, you may want to create either a monthly, quarterly or yearly budget. Having a monthly budget can be helpful if you are trying to keep your cash flow within a certain limit, or if you want to closely track your expenses. You may also have months where you know your expenses or revenues will differ from the norm. This can be especially true if your business is seasonal. If you have been in business for a while, you will obviously have more financial history to work off of. If your business is newer, focusing on recent cash flow trends and forecasted expenses for the next few months is a good place to begin.
In order to get started on a budget, you should reference the following financial documents and information:
• Cost of goods sold statements
• Tax returns from the past few years
• Mortgage or rent expenses
• Payroll expenses
• Utility bills
• Accounts receivable invoices
• Income and cash flow statements
After you have gathered your relevant financial information, it is time to break things down. Here are some calculations and metrics to consider:
• Bulk of Revenue. List the primary products and services that provide the greatest share of your company’s revenue.
• Sales Forecast. Create a forecast of sales or clients for the year ahead. Are you in an industry where you can rely on repeat customers, or are your shoppers generally first-timers? If you can take advantage of repeat business, it can be helpful.
• Inventory Forecast. You will likely not be 100% sold out of inventory at the close of every year. Compare your sales forecast to your inventory on hand to determine your estimated product costs for the next year, and forecast what your inventory will look like.
• Marketing Costs. Hash out a marketing plan for the upcoming year that details what specific actions need to occur in order for your business to meet its sales projections. If your expected marketing initiatives will have an expense associate with them, be sure to account for that in your budget expenses as well.
• Expense Categories. List the main cost categories relevant for your business, such as materials and labor. Try to take into account that the cost of these items can change over time. Your fixed costs, such as rent or mortgage payments, should be included here as well.
• Plan for Emergencies. No matter how detailed of a budget you create or how well you stick to it, sometimes the unexpected happens. Leave room in your budget for emergency costs and projects that could go over-budget despite your best predictions.
• Keep it Safe. Although it might work best for you to create a rough draft of your company budget by hand, it’s best to transfer your lists and calculations to a digital spreadsheet so it can be saved, shared, and easily edited. This will also help you in future years so you can start with the prior year’s digitized budget, copy it and adjust accordingly. There are many software options available to create business budgets.
Cutting Costs When Necessary
Sometimes there are situations out of your control, such as a price increase on supplies and materials, or a supplier going out of business. These unexpected hurdles can impact how much money your business is able to put towards each budget category. If you do find your business needing to cut back on costs, having your budget to reference and analyze can be extremely helpful.
Continue to Refine
Until budgeting becomes an automated habit, be sure to dedicate time to updating and maintaining your budget each month or quarter. As you come to better understand your expenses and revenue, you can adjust your predictions with more accurate figures. This will help you continually fine-tune your business budget to ensure it works for your company and is as precise as possible. Remember though that a budget is a guide. You will likely never create one that forecasts the future with 100% accuracy. There will always be small fluctuations with your projected expenses and income from month to month. Even with these small inaccuracies, creating a budget allows you to have a better handle on the financial health of your business.
Good luck budgeting, and if you are looking to discuss growth and financing opportunities for your MA or RI business, don’t hesitate to contact our Business Team today!