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How to create a business budget

Posted by Carol Mahamedi

March 10, 2022    |     4-minute read (707 words)

Building a business requires you to stay on top of every aspect of your growing organization. One aspect that deserves a lot of time and energy is your business budget.

Whether you’re running a small business or a global corporation, creating a business budget is critical. Knowing how to establish a budget for a small business allows you to make sound financial decisions that help rather than hinder your company’s growth.

What is a business budget, and how does it work?

Any good small business budget includes information relating to your current income and expenditures, as well as future growth forecasts. It gives you a complete overview of where your business stands financially and your dollars are being spent.

Business owners will typically go about preparing budgets for the business before doing anything else, as cash is the lifeblood of any company.

The basic process involves preparing monthly fixed and variable costs before allocating funds to achieve specific aims. Many businesses will create multiple budget types for different things, such as cash flow.

What makes a good business budget?

When working out how to make a business budget, you need to know what makes a realistic budget.

Before delving into how to create a business budget, here are the parts that come together to create budgets that are accurate and useful:

• Estimated revenue – The amount you expect to make from sales of products/services. These predictions rely on the previous year’s sales numbers.
• Fixed costs – Regular costs that don’t change from month to month include rent, insurance, and banking fees.
• Variable costs – These costs are influenced by production/sales volume. For example, raw material or production costs may often change, so they are classified as variable costs.
• One-off costs – One-time expenses, such as office furniture, software, and office expansions.
• Cash flow – The money traveling in and out of your business. Monitor cash flow both weekly and monthly, as it is the oxygen that keeps your brand going.
• Profit – After deducting expenses, you have your profit. Successful businesses should always be in the black.

Take note: salaries can go under fixed or variable costs. Most organizations allocate it to fixed costs, but it’s mainly up to you.

How to create a budget for your small business?

What do you need to know about how to handle a business budget?

For the first time, entrepreneurs launching a startup may be confused about what goes into a small business budget and where to get reliable numbers. Here’s how to budget for a company.

Step 1 Establish your revenue

The first step in how to budget for your business is to find your income sources and to add them together.

Make sure you’re calculating for revenue, not profit. Your revenue is what you have before deducting expenses. Figure out your monthly revenue by looking at your annual income and dividing accordingly.

Step 2Remove fixed costs

Add up all your fixed costs. Some examples of fixed costs include:

• Rental costs.
• Insurance.
• Banking fees.
• Taxes.
• Debt repayment.
• Asset depreciation.

Subtract your fixed costs from your total revenue for your chosen budgetary period.

Step 3Work out your variable expenses

The next step after fixed expenses is variable expenses. These are the expenses that change regularly. They could be expenses for essential business functions or discretionary expenses.

Some examples of variable expenses include:

• Training costs.
• Marketing costs.
• Equipment replacement.
• Office supplies.
• CEO’s salary.

Remove variable costs from your total revenue. At this point, you should already have an idea of whether you’re making a profit or a loss.

Step 4Generate a profit and loss statement

With the above information, you now have what you need to create a profit and loss statement. It’s easy to tackle this part of your small business budget.

Just remove all expenses from your income, and you’ll either be making a loss or a profit. This number can help you to determine what changes you need to make.

Step 5 Create your budget

The profit and loss statement is a historical document detailing the past performance of your business. With this document, you can figure out how to budget for your business and its future operations.

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