Most small business owners never deem it necessary to prepare a budget. There could be many reasons for their inefficiency on this count. Perhaps, they are more interested in running their business rather than spending time on an exercise that is, in their opinion, pointless.
Or perhaps, they think that they are too small and really don’t need one. Whatever the reason, these entrepreneurs may be omitting an important aspect of te business without even knowing it.
For example, you are applying for a short term business loan. The first thing that needs to be ascertained is whether you will be able to repay it. Without a budget, you will never be able to ascertain that you will have a definite amount of cash that you will be able to pay back to the lender.
In simple words, budgeting means balancing the expenses of your business against its income. Or a budget may also be defined as the estimation of your expense and revenue over a particular period in the future.
The following article will provide you with the simple steps that you should follow when budgeting for your small business
Identify and Estimate Your Income
The first step in budgeting requires you to identify the sources of income, and prepare monthly revenue estimation.
Your first revenue source is sales. Figure out your monthly sales, and add all other sources of income that your business may have.
Determine the Fixed Costs of Your Business
Fixed costs consist of all those expenses that recur every month with almost the same amount. These could be your utility bills, rent, transportation, and payroll. You need to pay for all these bills and expenses every month.
You can easily estimate the fixed costs of your business by analyzing these bills for the past few months. In fact, some of these bills only change after a year. An example is the rent of the property.
Your previous months’ bank statement will help you determine these expenses for the next month.
Determine the Variable Expenses of Your Business
All those expenses that recur but with different amounts are called variable expenses. Purchases are an example of variable costs.
The purchases of your small business never remain the same month after month. This is because, the amount of purchase depends on the sales you are making, the inventory at hand, and the production requirement.
However, by analyzing the above-mentioned elements and the estimated sales for the next month, you can arrive at a reasonably good guess about your purchase costs for the next month.
Determine One-Off Expenses
Budgeting will also allow you to incorporate all those expenses that are one-off cases. For example, the desktop used by your accountant is showing problems, and you know that you will be required to replace t next month with a laptop.
But you will not need to spend the same amount on a laptop again. This will be a one-time expense, and you should incorporate it as well in your next month’s budget.
Pull all the Numbers Together
Once you have the numbers, you can easily put them together and arrive at a simple budget for the next month.
Budgeting will allow you to estimate the amount of profit for the next month. You will have a clear idea of how much money you will make, and what will be left over after paying all the expenses. This profit may be used for business expansion and growth.
The Final Word
Budgeting for small businesses may seem like a difficult work but in reality, it is not. The most important part is the determination of reliable figures under each head. If these figures are right, your budget will be close to reality.
With the help of the above steps, you may also create budgets for the next few months or years.
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