November 29, 2019 | Last Updated on: January 17, 2024
DISCLAIMER: This article was written in 2019 and has not been updated. For more up to date information on economic impacts to small business funding, please read this recent article Strategic Budgeting: A Roadmap for Small Business Growth
A business budget can serve two distinct business accounting functions. A budget can serve to help forecast expenses and is also can help to contain costs. Running a business is a career path which can easily turn hectic. You never know what a given day will bring. That’s why it’s important for business owners to give themselves a head start on organizing and planning every company’s day-to-day operations. And that means budgeting. Having a budget plan is vital. That budget is an important tool for forecasting and creating wiggle room for expenses to come. When you do the work required to create a smart budget, you’re assessing your company’s status, trends, and future in a way that can creates a framework for small-scale decision making. The end of the year is the most important time to consider, revisit, and create a budget. Either alone or with a financial professional, you can look at how closely our company adhered to the previous year’s budget and how you can improve on that adherence in the year to come. But how do you create a business budget? What does the busy business owner who need in order to create one? Or if you’ve created one in the past, where can you focus your attention to make sure 2022’s budget is even more effective than in years previous?
It goes against everything you learned in elementary school, but there are real benefits to looking at the way other companies build their annual business budgets. The internet has a multitude of resources for creating a budget in different industries, from restaurants to software sales. Successful companies are successful for a variety of reasons. If you have an opportunity to examine how they manage their money, you might glean helpful pointers on managing yours. Remember, different industries have wildly different needs. While a company based on online product sales might be largely focused on shipping, a personal training gym will be focused on equipment upgrades. A restaurant has inventory, overhead, and staffing, while a hotel has different needs entirely. No two companies or industries are the same. For best results, look into how your specific industry builds budgets.
In order to build your business budget for next year, you’ll need to look at your budget and cash flow from the previous year. You need to see where you were in order to see where you’re headed. You’ll need to look at all of your financial activity from the previous fiscal year. Your cash flow statements, balance sheets, expense reports, profit-loss reports, payroll data, inventory, accounts payable, and one-off expenses. You’ll want to assess your profit-debt ratio and any interest accruing on small business loans. Do you have assets which have appreciated or depreciated? In addition to all the purely record-keeping documentation, you’ll want to compare your numbers last year to your budget. Did you go over or under? Did you stick to what you’d written as your plan, or did you veer off? If you veered, why? Were there massive one-off expenses you couldn’t avoid?
Once you’ve examined the previous year’s budget and financial records, you can start to build your budget for the next year. Add up all your income in the past year. Based on your month-over-month and year-over-year data, do you project an increase in income? Stagnation? Do you think you’ll lose income? Once you’ve established an income projection, you’ll need to factor in those unavoidable fixed costs. Rent or utilities for your space, loan payments, fees for your business credit card, cell phones, salaries, ongoing accounts with vendors, payments to accountants or lawyers, and, of course, any necessary insurance. All the costs you can state with certainty will be occurring in the next year. Then add in the variable costs. You should base this projection on the variable costs you accrued in the previous year, similar to how you calculated your income. You may not have an established monthly transportation cost, like you would with an internet connection, but if your business involves a similar amount of travel month over month, you can project those costs in advance. Once you’ve projected your costs, you should build in a bit of wiggle room. Business doesn’t always go according to plan. You will want to make sure to give yourself a bit of financial room to maneuver for some of life’s unexpected incidents. Your company’s vehicle could suffer a major malfunction, grinding business to a stop. If you haven’t set aside money in the annual budget, you may be looking at adding to your debt in order to get back on the road. Taking out an unexpected loan throws even further mayhem into your budget.
Once you’ve gotten a rough budget from these calculations, have another look and think about where you can add income or decrease costs in order to create a more profitable budget for the following year. This isn’t about cutting corners as much as it is about finding new ways to increase profits and allow you to have an expanded budget the next year, allowing for more investment in your company. Can you save on utilities by switching or bundling providers? Is there another inventory supplier available that could help you save cash? Based on your previous year’s sales, would it be wise to purchase inventory in larger quantities to bring wholesale costs down? You may find that saving a bit of money can lead to increases in revenue. Saving money on inventory could lead to an increased marketing budget, leading to increased profits. That means growth. And for most small business owners, that growth is a top priority.
Creating a budget means having a financial plan. It means keeping spending in check and having a clear-eyed and objective look at where your company stands. Budget increases can lead to expansion and growth, and your year-end examination of your previous year’s budget can shed light on where your company is spending unnecessarily – and where you can improve. And there’s no reason to delay building your business budget for 2022. Many online book-keeping companies provide budget templates for free or at a low cost, and your tax professional or accountant can get a jump start on using the documents you gathered to create a budget to help save money on taxes. And even though the new year is still a few weeks away, you’ll need to gather a considerable amount of data and documents in order to create the sort of budget your company deserves. By putting together the information now, you’re preparing yourself and your company to be organized, profitable, and focused as you jump into the new
