Your business started with a passion and evolved into something that you’re proud to call your own. Now it’s time to get your finances in order so you can endure the long haul. The first step in handling your business’s finances is to create a budget.
“By creating a budget, you’ll be able to hold the company accountable for its expenditures, reduce costs, and prepare for a worst case scenario. It serves as a measurement tool that can visually illustrate if you have enough cash to operate or to grow,” says Lisa Knight of The Strategic CFO.
Without a dedicated CFO, however, creating your first business budget can seem overwhelming. Use these simple steps to assess costs and take a good, hard look at the financial statements and long-term financial health of your business.
Start With the Right Tools
You can do you entire budget manually. With technology, however, there are a variety of resources and tools that will guide you along the process. Here are a few for getting started, with an option for business owners at every stage of the budgeting process.
● Templates: Keep it simple by starting with a downloaded budget template that will guide you through the process manually. If you’re a hands-on learner, this may be the best place to start.
● Simple budget calculator: Next, get some basic numbers in place with this simple budget calculator. The only details you need are: money in and money out. You’ll see how much you’ve saved or over-spent, giving you a benchmark for improving in the coming months.
● Automate: Finally, check out these 10 programs and apps for business budgeting, all of which will help automate the process as you move forward.
Know The Numbers
Math-minded or not, business owners need to deal with numbers every single day, especially when it comes to managing operational costs, ROI, revenue and more. To get your budget started, track your financials e.g. using an income and expense tracker app. Focus specifically on the following:
Starting and running a business costs money, but do you know exactly how much? If you don’t want to end up in the red, you need to take a good hard look at these numbers. Costs can be broken down into three categories: fixed, variable and semi-variable.
● Your fixed costs are the ones that don’t fluctuate; your monthly rent, staff salaries and material costs.
● Variable costs can change based on production, output or other factors. For example, your phone bill is a variable cost if your provider charges a per-minute fee.
● Semi-variable costs are a combination of fixed and variable. For example, if your energy company charges a flat rate but also charges a kilowatt per hour (kwh) charge, than your costs will fluctuate based on the amount of energy you use.
It’s especially important to note the potential operating costs, not just of your business, but of an office space if you’re going to sign a lease. This is where much of your monthly expenditures will be spent, so it’s important that you understand exactly how costs are broken down, what the landlord will cover and what your responsibilities are as the tenant.
“Operating expenses represent a cost center to the tenant,” according to Laurens Nicholson, principal and director for Windsor Aughtry. “For example, will all building expenses be passed directly through to the tenant, or will expenses be passed through once the expenses exceed a certain dollar amount?”
List these costs in a living document that can be updated monthly or quarterly, depending on your needs. When it comes time to sign a lease, or make another significant financial commitment with your business, you’ll be prepared to ask the right questions and budget the appropriate amount of money.
Now that you know your total costs, you can determine how much revenue you need to cover your expenses. Of course, you want your profit to be in excess of your costs, but by how much? This is your profit margin.
“Gross profit margin is a financial metric used to assess a company’s financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS),” according to Investopedia. “Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues.”
Note that your cost of goods sold includes material costs to make your products, as well as the labor costs to pay your staff.
Now it’s time to figure out how you’ll maintain that profit margin, and determine what happens if you don’t. Can you afford to keep staff or your office? With a plan, you’re ready to take action when and if the time comes, rather than being caught off guard. Learn more about calculating profitability ratios.
Include an educated prediction of your revenue when creating your first business budget. Your revenue forecast should include total sales and price per product. To find this information, you’ll need to conduct market research. This provides insight into how much you should charge, average revenue for your industry and more, will help you accurately forecast revenue and set profit goals.
If you’ve never done market research before, check out our simple guide, “3 Steps to Do Market Research.”
Get Your Taxes in Order
As a small business owner, there are a few things you need to know about taxes and budgeting. First, you will need to pay estimated taxes multiple times a year based on income and revenue. If you miss these payments, you can be subject to a hefty fine. Build these estimated tax payments and due dates into your budget so you know how much to put away in between tax periods. Use this tax calendar to get all of your dates set.
You’ll also qualify for deductions and write-offs that will save you money come tax time. “Although startup expenses differ by industry, most business types can deduct investigational costs related to researching markets and analyzing products,” according to April Maguire from Quickbooks.
Maguire continues, “Additionally, startups can deduct costs accumulated before they open for business, such as training employees, attending trade shows and seminars, locating suppliers and advertising to potential clients.”
Keep track of all expenses and receipts, both online and hard copies. This will allow you to prepare for tax season and the unexpected tax audit, if that should happen to you.
Create a strong foundation for your business with a good budget. While you can write this yourself, connect with a financial professional who can provide guidance and feedback throughout the year. Even math-minded entrepreneurs and business owners will need help, and it’s better to have someone on your side who knows what they’re doing than get caught in a costly situation.
In the end, a budget will be your lifeline when things go off the rails—which they will. With a financial plan in place, you’ll be ready to navigate the bumps along the way, allowing you to be successful for many years to come.