Creating the budget for your business is essential to obtain a constant degree of growth and to be able to achieve the success of your company.
“A journey of a thousand miles begins with the first step.” – Lao Tse
In the simplicity of that phrase lies a lot of wisdom, especially for those who are creating a small business, because it generates the necessary motivation to undertake the long adventure that is to launch a business.
We are not philosophers, but we dare to add something to Lao Tzu’s phrase: “A journey of a thousand miles begins with the first step, but it would be nice if that first step was in the right direction.”
Why we need budgeting
There is one step that you, as a business owner, should take early on to help steer your business in the right direction: budgeting. Creating the budget for your business is essential to obtain a constant degree of growth and to be able to achieve the success of your company.
A budget is a very useful tool for you to feel in control of your money. Every plan to achieve your financial goals begins with a budget. Your budget will help you:
Make financial decisions.
It’s like having a map before hitting the road. It helps you assess the current state of your business and what you need to do to achieve your future financial goals.
Identify where to cut your expenses or increase your income.
It is the key to increasing your profits.
Get financing to grow your business.
A lender or investor will require you to submit a detailed budget of your income and expenses.
Simple Guide to Budgeting
Owning a small business is a responsibility that comes to life in the form of countless interconnected elements: attracting customers, increasing sales, shortening production times, improving quality, reducing costs – so many things that one could become overwhelmed and out of control.
If you own a business, knowing how to budget will help you understand how money flows in and out. But how does it work? It is very simple. What’s more, the concept of a budget is as simple as ABC (or rather A – B = C ):
- Identify All Your Income
- Find out how much money your business is making each month and where it comes from. Your business may have only one source of income, or perhaps you have multiple ways to earn money. For example, a clothing store could have only sales to the public as a source of income, while a landscaping company could have several sources, such as exterior design, installation of irrigation systems, monthly maintenance contracts, the sale of plants and fertilizers, etc.
- Identify all your expenses
- Your expenses can be divided into three categories: fixed, variable and unique. Fixed costs. Your fixed expenses are all the things you spend money on predictably from month to month. This can include expenses like rent, payroll costs (if you have employees), and utilities with constant fees, like internet plans, website hosting, and other costs, like subscriptions.
- If you have just launched your business you can use projected costs. For example, if you signed a rental agreement, use the amount of monthly rent that you will pay in the future.
- Variable expends. Variable expenses fluctuate each month based on the performance and activity of your business. They may include, for example, utilities that you charge based on usage (electricity or gas), package shipping costs, sales commissions, or transportation costs. After a while, you will have an idea of how these expenses fluctuate with the performance of your business or during certain months of the year, which can help you make more accurate financial projections and budget for the future.
- One-time expenses. Although these expenses occur less frequently, you can calculate what those one-time expenses will be and anticipate those purchases so they don’t burden your business with unnecessary burden. For example, if you know that in the future you will have to buy machinery, vehicles or computers, it is important to include them in your budget. You may even plan on having certain unexpected expenses, such as repairs or emergencies.
- Calculate profitability (profitability) by subtracting your expenses from your income .
- We get to A – B = C. In your company’s budget, compare the total of A) your income against the total B) of your expenses (the sum of the fixed expenses, the variable expenses and the one-time expenses). Subtract the cash flow out (expenses) from the cash flow coming in (income) to determine C) your overall profitability.
Here’s an illustration of a budget for an imaginary business (amounts are just examples):
INCOME:
Fees charged to client A: $ 5,000
Fees charged to client B: $ 4,500
Fees charged to client C: $ 6,000
Product Sale: $ 1,500
Loans: $ 1,000
Savings: $ 1,000
Investment income: $ 500
TOTAL INCOME: $ 19,500
EXPENSES:
FIXED COSTS
Rent: $ 1,000
Internet subscription: $ 50
Website Subscription: $ 50
Payroll costs for employees: $ 5,000
Insurance: $ 50
Government and bank fees $ 25
Mobile phone: $ 50
Counter: $ 100
Attorney: $ 100
TOTAL FIXED EXPENSES: $ 6,425
VARIABLE EXPENDS
Sales commissions: $ 2,000
Contractor salary: $ 500
Electric bill: $ 125
Gas bill: $ 75
Water bill: $ 125
Printing Services: $ 300
Raw materials: $ 200
Digital Advertising Costs: $ 750
Travel and events: $ 0
Transportation: $ 50
TOTAL VARIABLE EXPENSES: $ 4,125
ONE-TIME EXPENSES
Office furniture: $ 450
Office supplies: $ 300
Business meeting: $ 1,000
New administrative software: $ 500
Gifts for clients: $ 100
ONE-TIME EXPENSES: $ 2,350
TOTAL EXPENSES: $ 12,900
In this example, we subtract total expenses ($ 12,900) from total income ($ 19,500) to get total net income ($ 6,600) – profitability.
Once you have a clear idea of your monthly earnings, you can use that information to make the right financial decisions to move your small business forward.
For example, if you find that you are spending more than you are making, you can reduce your expenses and focus on finding new customers. But if you are earning more than you are spending, you could invest your earnings in your business (such as investing in new software or equipment for your office).
Use your budget to stay on track
That first step of creating your budget can seem like a hassle. But while it takes a bit of time and energy, it’s worth the extra effort. A thorough business budget gives you the financial information you need to make the right decisions for your business to grow, expand, and prosper in the future.
Create your personal financial statement
In addition to creating a budget, consider creating a personal financial statement, which is a valuable tool for obtaining business credit.
Your personal financial statement describes all the information about your personal finances, including your resources (everything you own, like money, cars, and investments) and your obligations (all your debts). Subtract your obligations from your resources to calculate your net worth, which is your total financial worth.
