Do you have a small business or are you thinking of starting one? Here is how you can craft a workable budget for your small business.
One important document you are meant to keep as a business owner is a budget plan for your business. A budget plan is a document that projects the expected income and expenditure of your business within a period of time. Most budget plans are created to cover a period of one year or bi-yearly. Most big companies assign the role of creating the company’s budget to professional accountants. As a small business owner, you can create your own budget plan for your business using the steps provided in this article. Before I discuss the process of creating a budget plan, let us look at some of the importance of a budget plan to your business.
Why You Need A Budget Plan For Your Business
- To Keep Track of Your Progress: Your budget plan helps you keep track of the financial progress of your business. How? Your budget plan is created to project your estimated cash flow and expenses for the next one year. At the end of the year, you can compare the actual financial income and expenditure with your project to know the financial strength and weakness of your business.
- Access To Loan: Most financial institutions require a financial projection and estimate from business owners before they can grant them a loan. You can present your business budget plan to any bank as your financial plan in order to get access to a business loan.
- Business Growth: Your budget plan helps you make analyses of your spending pattern over a period of time in order to make necessary adjustments for your business growth.
Table of Content
How To Create A Budget Plan For A Small Business
Create A Template
You need a template to create your budget plan. A template is a framework that makes the whole planning process easy. There is both paid and free budget template software on the internet that you can use, but it is better to create your own custom template. Your template should comprise of two parts; income and expenditure columns. Each of the columns should be further broken down to contain similar expenditures.
2. Know Your Business Goals
Your business goals serve as a guide to making a good budget plan. Your business goals, when compared with your budget plan and action plan at the end of the year will help you keep track of your progress. Details of your business goals can be found in your business plan.
3. Breakdown Your Cost
After you have created your custom template, the next step is to break down your cost and expenditures for the next one year. You start by making a list of all your expected expenditure within the financial year and add a price estimate besides each. Your cost should be further divided into fixed cost and variable cost. Fixed costs are those expenses with a fixed rate. Example of fixed cost include; Salaries for employees, rent, taxes, interest on loans, insurance fees, legal consultancy fees, and utility bills. Variable costs, on the other hand, are expenses with fluctuating rates. Examples include; the cost of adverts, office supplies, transportation, cost of acquiring raw materials, contractor’s fees, and cost of marketing the business. You can get a close estimate of your expenditures by going through your bank statements, past cheques and account reports. Also, you can call up your contractors and suppliers to get an estimate of supplies for the next one year.
4. Project Your Income
Your income includes all the cash that flows into your business. It can come from sales of your products, your savings, service charge, dividends from investments, money from adverts, and loans from banks. Before you make estimates for your income, it is advisable that you carry out some research from similar businesses in your location. Find out the amount being charged for similar products. If you are a professional, find out the service charge from other professionals in your location. Compare it with the cost of production to know your profit margin.
5. Make Provision For Miscellaneous
These are unexpected incomes and expenses that may come in along the line. You need to provide for unexpected expenditures like office supplies, new taxes that may be incorporated by the government and litigation fees. Also, your budget should be flexible to accommodation financial changes along the line.
6. Add Up Each Column
After you have gotten your estimates, you add up the total for each column. Get the total for expected income and the total for your expenses. Enter the numbers in a spreadsheet.
7. Get Your Profit Estimates
The main purpose of setting up your business is to make profits. One of the reasons you need to make a budget plan is to know your profit expectations for the coming year. To get the estimated profit for your business for the financial year, you need to subtract your expenses from your income. Your income should be higher than your expenses. If after making the subtraction your expenses are higher than your expected income, then you need to make some adjustments to your expenses. Go through your expenses and look for avoidable expenses you can cut down or find out other ways to increase your income.
8. Consult A Professional
It doesn’t hurt to be thorough in whatever you do. The final step in your mission to create a business budget is to take your final budget to a professional accountant for a final perusal. It may cost you a small fee to consult an accountant, but you will be saving yourself a lot of headache in the future. A professional accountant should be able to point out minor mistakes that skipped your attention as you were making your budget and also make suggestions on some steps you can take to reduce your expenses. Also, if you are going to opt for a business loan using your budget plan, then consulting an accountant is inevitable for you.
With this information, you should be able to make a business plan for your small business.