Building Your First Budget To Start Your Small Business
After you’ve successfully fundraised for your business idea, you need to budget for every penny that comes in prudently. Otherwise, you risk being part of the 29% of small businesses that fail by running out of cash to sustain their operations.
Keep reading as we walk you through building up your first budget as a small business. Whereas budgeting involves estimating your revenues and expenses, it also reveals funding gaps in the industry. Reach out to lenders for Microloans to plug in anticipated short-term cash flow shortfalls as shown in your budget.
What Goes Into A Budget For A Small Business
1. Reviewing Your Revenues
This entails tracking down sales that the business has generated overtime for an existing business, let’s say 12 months. For a new business, you have no historical revenues to look to. You’ll work with your start-up capital.
The funds could be from personal savings, crowdfunding sources, and online lenders giving microloans, investor funds, or grants.
2. Tracking Your Fixed Costs
Identify the fixed costs that recur weekly, monthly, or annually for your business to operate successfully.
Common fixed costs in a business; payroll, rent, supplies, taxes, and equipment lease payment.
Compile your fixed costs and deduct them from your income. Take note of fixed expenses that are peculiar to your business.
3. Add Up Variable Costs & One-off Expenses
Variable costs fluctuate from time to time based on how you utilize such services.
Common variable expenses in business; cost of goods, commissions, marketing expenses, owner’s salary, raw materials, and utilities that vary with production.
Variable costs may also encompass one-off expenses such as revamping the office interior to boost your brand image.
4. Benchmark Costs Against Your Industry
Compare your costs against the industry average to gauge how efficiently you utilize resources.
For a starting business, use industry benchmarks as targets of your cost structure to ensure you’re building a cost-effective company.
5. Create An Emergency Fund
Set aside an emergency fund for a rainy day when emergencies, unforeseen expenses, or opportunities arise.
6. Tabulate Your Data Into A Profit & Loss Statement
Subtract your expenses from your revenues to determine if you have made a profit or a loss over time.
You’ll notice that there are many one-off costs in a business that’s starting. Accordingly, you will likely run the business for a while before reaching your break-even point to realize a profit.
7. Adjust Your Budget As Your Business Grows
After a series of trading cycles, you’ll be in a position to make an intelligent projection of future business performance. You’ll be relying on past trends to predict future outcomes.
Make the necessary adjustments that reflect the change in the business environment. After you have drawn a budget for your small business, make amendments periodically if need be. You can make the amendments quarterly, half-yearly, or annually.
How To Track Your Expenses And Income
- Use budgeting apps that track expenses.
- Use tracking worksheets to keep a pulse on your expenses.
- Review your account statements regularly.
- Cap budgets to different departments.
Adjusting Your Budget As Your Business Grows
A reasonable budget is a dynamic tool that responds to the prevailing business environment. Business growth is reflected in the increase in monthly revenues and expenses.
To respond to changes as a result of business growth, you may need to adjust key components of your budget, such as:
- Variable costs; to produce more, you’ll need to put in more factors of production.
- Fixed costs; a sustained growth in production over a period will exert pressure on your available facilities and permanent fixtures. You’ll need to invest in capital expansion, such as moving to a bigger production unit or opening new branches.
- Borrowing need; bulk customers who come into your business may want to pay on credit terms. Consequently, you’ll need to reach out to lenders for Microloans to fund your business operations as you await payments from your customers.
- Savings; business growth may mean you need to put aside more funds for unexpected and future development.
You’re starting on the right footing by building a budget as you start your small business. A budget enables you to determine your business’s revenues, expenses, profitability, and efficiency. Draw a budget for your business today to ensure your business isn’t living beyond its means. Lastly, a budget also helps to save for future emergencies and expansion.
David is a dynamic, analytical, solutions-focused bilingual Financial Professional, highly regarded for devising and implementing actionable plans resulting in measurable improvements to customer acquisition and retention, revenue generation, forecasting, and new business development.