5 Steps To Create A Profitable Budget For Your Small Business
Customers and product aside, there is nothing more important to your business than your budget. Without it, your business will cease to run and you won’t be able to land a profit. It’s imperative then that you understand how to create a successful budget that suits the needs of your business and can provide growth and scalability. Here at The A Firm, our experts hear this question a lot. Well, we’ve saved you the time and curated a master course on designing a budget that works for you.
What Is A Budget And Why Do You Need It?
Simply put, a budget is what you allow your business to spend on expenses each month or year. A budget is compiled of necessary expenses, like rent, electricity bills or any other unavoidable costs that are mandatory for running your business. But it also involves unexpected costs, expenses that fluctuate from month to month, and expenses that are required to grow your business. Unfortunately, you can’t make a lot of money without spending a little yourself.
A budget is important because it is the single-most straight-forward and clear way of understanding what you can afford and what you can’t. It is also necessary to plan out your business’s future, how you are tracking profit-wise, and whether or not you are hitting your business goals.
A budget is crucial; especially when the majority of small businesses fail within the first few years. A profitable budget is needed to keep you and your business on track.
#1 Compile Your Total Revenue Sources
Your first step will be to tally up your total revenue. This is important because it is essentially the lifeblood of your business, and determines exactly how much profit you will have to grow your business.
A great place to start are your sales figures. Add onto this any additional avenues of revenue that you have as well. The amount of extra revenue sources that you have will depend upon the type of business you are running. Or, in some cases such as brick-and-mortar businesses, you may have a single source of income.
For now, you should keep the tally of income flowing into your business on a per monthly basis, to keep things simple. You may also consider hiring a qualified accountant.
#2 Examine Your Fixed Costs
Next, you are going to need to understand the money that is flowing out of your business. We mentioned earlier that some expenses can be fixed, variable or one-off. All businesses will include a mixture of the three.
Understanding how much money your business is spending on expenses can be eye-opening, and a little overwhelming – especially if you’re not familiar with bookkeeping. But it’s critically important in understanding how to optimise your business moving forwards, and may even help you save on unnecessary expenses.
The first expense you will need to take note of is fixed costs. These are business expenses that remain the same each month. They can include:
- Insurance premiums
- Loan payments
- Phone and utility bills
- Website upkeep
- Payroll (including your salary)
#3 Don’t Forget About Variable Expenses!
Variable expenses are another factor you will have to understand to plan your budget. Similar to fixed expenses, they will occur monthly at a time. However, they differ in that their prices will typically fluctuate each month.
Depending upon the nature of the variable expense, you may be able to gain a sense of how high or low such an expense will fluctuate, roughly speaking. For example, if the highest your business spent on electricity was $5000 this year, and the lowest was $3000, it’s fair to assume each month it will likely be within the two.
Examples of variable expenses include:
- Electricity bills
- Shipping costs
- Sales commissions
- Travel costs
- The price of raw materials
#4 Ensure You Have A Nest Egg For One-Off Costs
Most businesses will consider one-off costs in a negative light, such as catastrophes or unforeseen complications. But it need not be so negative all the time.
A one-off cost can include buying new hardware for your business, such as a laptop or modern computer, office furniture, appliances or even gifts for your clients!
Why is it so important to keep track of these expenses? Especially when they are so numerous and tedious to bookkeep? Because you are planning for the worst case scenario. When one-off costs do turn bad, they can be a sudden and significant financial burden on your business if you don’t have the funds to deal with them immediately.
By predicting upcoming one-off expenses and making space for them on your budget, you will be keeping your business prepared for any complications that may arise in the future. (And believe us, there will be plenty!)
#5 Subtract Total Expenses From Total Income To Secure your Budget
Don’t worry, this is the fun part! Tally up your fixed expenses, variable expenses and one off-costs. Now, subtract that number from your total income and you’ve got yourself a business budget!
Hopefully, your income will be higher than your total expenses and you will now be able to plot a path forward for the future of your business. Making this process a regular, monthly task is key to ensuring sustainability and growth for your small business. A good budget will also help you navigate any pitfalls you may encounter, by ensuring you are not overspending or letting extra cashflow go to waste.
Now that you’ve got the right tools for setting up a profitable budget, why don’t you contact our expert team of accountants at The A Firm. Our team has decades of experience in crafting optimised budgets for small businesses that return outstanding results. Get in touch today!
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