4 Easy Steps to Creating Your Small Business Budget
For many small business owners, creating their yearly budget is one of the more painstaking tasks of their company. Today, we talk about 5 easy steps to building a budget for you small business. Interested in learning more? Check out our Finance Fundamentals for Your Small Business May 7, 14, & 21! Get tickets here
Photo by Fabian Blank on Unsplash
Step 1: Determine Your Revenue
Your most basic revenue is simply selling price times number of units sold. This can easily get more complicated with add-on products/services or just based on the number of products you sell. By determining your revenue, you gain an idea of how much money you are bringing into your company and think about how you can allocate your earnings. When calculating your revenue, keep in mind this is simply the money you are bringing in before you adjust for your expenses. Over the course of a year, calculate you revenue monthly to find trends in your revenue. Based on factors like season, you may find your revenue stream changes.
Step 2: Determine Your Expenses
While we love to see money come in as revenue, we also have to account for money lost through expenses. Companies have two types of costs: fixed costs and variable costs.
Fixed costs are recurring static costs and can occur weekly, monthly, or even yearly. Each business may have different fixed costs depending on their needs, so be sure to analyze what your fixed business expenses are.
Variable costs are costs that vary with production. For example, if you often travel to see clients, a variable cost may be the cost associated with the number of miles you drive. These types of costs vary from amount of production (if you produce goods), weekly, monthly, or yearly. Take careful note of the types of variable costs your company incurs to get a vision of your total costs over time.
By adding your fixed costs and variable costs for a certain period of time, you can see as a whole what types of revenue you need to make to cover these expenses.
step 3: Establish Your Contingency Fund
Like with your personal finances, it's important to have an emergency fund for your business. This fund covers similar unplanned expenses such as technology or appliance replacement. While it's tempting to reinvest all surplus profit, saving into your contingency fund will help reassure you if a situation arises.
step 4: Make a Profit and Lost Statement
To calculate your total profit, subtract your total expenses from total revenue. Repeat this process for different months or seasons and see if your profits have a trend over time. Have a loss one season? Use the other information you've gleaned to see where revenues weren't high enough or expenses were too high. Similarly to your other statements, measure your profits and losses over time to see if you can find a trend.
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