Small Business Budgeting

Table of Contents

Small business budgeting is like painting a picture of the current and future situation of a business. Unless there is workable a budget, a small business or an established entity may not be able to provide a snapshot of their working capital, cash flows, and future earning potential. Before making money, it is important to provide a business plan, and drafting a budget is the potential key to a successful business.

This tool can help understand business expenses, the way costs are distributed, and how profits will be used or reinvested in the business. It is a roadmap that needs to be charted and provided to investors. A budget is also a quick way to secure a business line of credit in minutes.

What is a business budget?

A budget is a detailed plan that outlines where you’ll spend your money monthly or annually.

You give every dollar a “job”, based on what you think is the best use of your business funds, and then go back and compare your plan with reality to see how you did.

A budget will help you:

Forecast what money you expect to earn
Plan where to spend that revenue
See the difference between your plan and reality

The Basics

Budgeting works on experience and discipline. To increase effectiveness and efficiency, there is a need to understand the basics of how the budgeting process starts,

List down your income and expenses first. They are important ways to assess working capital loan requirements.
Use a budgeting template that is available online, or make your own to help list down the costs and their explanations. Much digital accounting software such as Xero and QuickBooks provides hundreds of templates to choose from. A working capital template can also be helpful.

Components of a Successful Budget

The successful small business budgeting process will include the use of cost centers and a proper understanding of the business. The startup costs, the number of employees and their salaries, the revenues that will be generated, and the profits should all be written in a comprehensive manner. Another critical component is the time frame used. The time frame helps assess if small business funding can be repaid or sought. Many budgets are usually annual, or semi-annual.

These annual budgets are compared with actual and forecasted budgets. Financial software can automatically include columns that help in making meaningful comparisons. As per the SBA, the following components should be present in any budgeting process:

Sales and Revenues that highlight future sales, the number of units to be sold, and any inflation predicted. The best estimator of potential sales is looking at either industry averages if the business is new, or past year sales.
Total Costs includes expense, depreciation charge, interest payments, small business loan interests, and possible revenue of capital expenditure that will be needed to help produce products and services. A small component of working capital is always added to provide for the payment of the usual yearly expenses and is returned back to the business at the end of the year.
Fixed and Variable Costs are usually seen as a component for production and inventory use. These need careful appropriations because they can fluctuate with an increase and decrease in production numbers.

Most businesses have fixed costs that are independent of sales revenue, such as:

Building or office eases or mortgage costs
Loan payments (if using debt financing)
Insurance
Vehicle leases (or loan payments if the vehicle is purchased)
Equipment (machinery, tools, computers, etc.)
Payroll (if employees are on salary)
Utilities such as landline phone and internet charges

Variable costs increase or decrease according to the level of business activity. Examples include:

Contractors’ wages or commissions (for salespeople)
Utilities such as electricity, gas, or water that increase with activity
Raw materials
Shipping and delivery costs
Advertising (can be fixed or variable)
Maintenance and repair of equipment

Net Present value is the single most important part as it provides inflation-adjusted profit assessment for future projects and sees a return on small business loans. Projects with positive NPV or IRR are usually undertaken over others.

conclusion