How to set up a business budget in 10 steps
How do you know when you’re spending too much on your business, and when this is a good idea? One of the most important things you need to do as a new business owner is plan for your business. This article will show you how to create a business budget that works for you.
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1. Define your budget and scope
Define your budget and scope by breaking it down into categories. For example:
Operating and marketing expenses, inventory, equipment costs, taxes, rent and other expenses.
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Scope your budget by identifying how much money you will spend in each category. For example:
– You will spend XAF10,000 on operating expenses.
– You will spend XAF2,000 on marketing expenses.
– You will spend XAF1,000 on inventory.
2. Set priorities
Prioritize your expenses by setting goals for each category. For example:
– You want to generate XAF1,000,000 in sales this year.
– You want to save XAF500,000 on operating expenses.
3. Create a budget
Create a budget by listing each category and the corresponding amount of money you will spend in that category. For example:
- Operating expenses: XAF100,000
- Marketing expenses: XAF30,000
- Inventory: XAF100,000
- Equipment costs: XAF20,000
- Taxes: XAF20,000
- Rent: XAF25,000
- Other expenses: XAF5000
4. Add up income sources
Start with the easy stuff.
Sales, Service fees, Commission, etc.
5. List your fixed costs
A business budget is essentially a roadmap of all the expenses you have. You should include everything from any recurring costs that are tied to a monthly, weekly, or yearly cycle (such as electricity or office supplies), to any one-time costs (such as a down payment for a new business or a grand opening).
Since fixed costs are decided before you start, you should include them in the first step. It’s critical to identify all of your fixed costs before you begin to plan your budget.
Examples of fixed cost include:
Rent/lease, Telephone, Electricity, Water, Internet, Employees’ salaries, Insurance, Property taxes, etc.
6. Add up variable costs
Variable costs are those costs that vary from month to month, and they are the biggest challenge for many small business owners. Fixed costs, such as rent and electricity, are easier to plan for, than variable costs. These costs are often based on the size of your business, so it’s important to check with your accountant or CPA to figure out what can be changed or negotiated.
In general, variable costs include costs that you can’t accurately predict or plan for, such as marketing spend and travel. Variable costs are much more fun to budget for, so make sure to add up all the expenses that are dependent on the state of your business.
Variable costs are expenses that increase or decrease with each transaction or sale, such as a marketing campaign.
Remember, the purpose of the business budget is to help you identify and plan for the things you can’t control, so you can make informed decisions.
Variable costs include:
Advertising/marketing, Utilities/water, Employee benefits, Taxes, Marketing spend and advertising, Travel to clients, Software and technology, Subscription fees, Contractor services, Office supplies/Equipment, Transportation, Variable payroll costs, etc.
7. Predict extra spend
If you’re like many business owners, you sometimes spend more money than you can account for. Whether it’s a slow month or you’ve just purchased a new item, you may need to add some extra cash into your budget to cover unforeseen expenses.
This is an important step, but often the most challenging to plan for. This is where the real meat of the budget will come in. You may not have all your answers down, but you should have a good idea of the ‘MUST’ spend and the ‘WANTED’ spend.
You know what you need to spend on salaries for the next few months, and you can plan accordingly.
Extras are expenses that can be called upon at any time, or are dependent on the behavior of others. Examples of extras are:
Office supplies, Utilities, Advertising costs, Office equipment, Filing fees, Onsite services, Marketing, Price increases (e.g., a special promotion), New equipment, Office supplies or materials, New employees, Expense account needs, etc.
8. Analyze cash flow
Cash flow is simply the amount of money coming in versus the amount of money going out. When you have a good idea of your income and expenses, you can calculate the actual flow of cash in your business.
It’s important to note that the amount of cash coming in is not necessarily equal to the amount of cash going out. You may have more sales than expected, or you may need to pay back a loan early.
It’s significant to analyze your cash flow on a regular basis to see how much money you’re leaving on the table. If you aren’t tracking your cash flow very frequently, you may be in the dark when it comes to how much you’re actually making or losing.
You may want to set up a spreadsheet to track your business’s cash inflows and outflows, as well as any loans or bank accounts you may have.
9. Adjust for the future
For most small businesses, accounting, and bookkeeping are set up to be monthly oriented. However, it’s essential to budget for the future as well.
This means anticipating and budgeting for the next 6-12 months, depending on how long your business has been in operation. You may want to start with a simple spreadsheet to track your cash flow.
Even after you have completed your business budget, it’s important to adjust for potential future needs. If you are a sole proprietor, you may want to track sales for the next several months to determine if you need to add another employee or hire someone to help with the workload.
If you are a business owner that is planning to expand, you may want to track your sales for the next many months to make sure you can sustain the increase in revenue. Saving costs instead of spending them. The key to business success is to avoid spending your budget on incumbents.
10. Track your progress
Track your progress by reviewing your budget periodically and adjusting your spending as necessary.
Budgeting for your business is hard work, and it is tempting to spend more than you budget for when things are going well, but this is the exact opposite of what you want to do when things are not going well.
It is much easier to set aside money for things that you know you will need, like for payroll or insurance, so that you can focus on other things that may be more urgent. If you have a small business, consider talking to your accountant about how to set up
Budgeting, especially when you’re just starting out.
It can be tempting to spend money on the wrong things, such as a fancy new website or a fancy new computer. In the end, if you spend too much money on one thing, you may not have enough money for other things. The best way to get started is by thinking about the types of expenses you want to incur, how much money you have to spend, and how you will measure your success.
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This content has been prepared for information purposes only. It is not intended to provide, and should not be relied on for, tax, accounting or legal advice. You need to consult your own tax, accounting or legal advisors before engaging in any transaction.