When you are starting a business, there are a lot of things to stay on top of, from marketing and finding new clients to building a website and establishing your digital presence.
But there’s one element that you want to stay on top of from the very beginning—and that’s your business budget.
Some may say finding sales is more important than crafting a budget plan. If you fail to plan, then plan to fail. Planning a business budget should be done at the beginning of the year and reviewed half yearly or yearly to ensure your business cash flows are on track.
Before we get to the first step of creating a small business budget plan, let me convince you why you need to do a budget plan.
Why is a business budget plan important?
A business budget is an overview of your business’ finances. It outlines key information on both the current state of your finances and your long-term financial goals. Here is why you need them:
- Helps to make financial decisions. Planning and creating your business budget helps you evaluate where your business finances currently stand and what you need to do to hit your financial goals in the future.
- Easily identifies where to cut expenses or grow your revenue. Having a business budget plan will give you an overview of your business’ financial status. It can help you identify areas to decrease your spending or increase your revenue.
- Gets funding to grow your business. Getting a business budget ready can help you to easily show to your future investor or business loan evaluator how your business is performing and, in return, get a bigger funding.
These are just some important points of creating your business budget. Now, let’s look at steps of creating a business budget plan.
5 steps to create a business budget plan
Step 1: Determine fixed costs
Start off your budget by determining all your fixed costs. Your fixed costs are any expenses that stay the same from month-to-month. This can include expenses like rent, utilities (e.g. Internet bills or phone plans), website hosting, payroll costs, etc.
Personally, I would prefer to start with costs involved, as it gauges how much the business is spending. It helps to act as a foundation for the business to perform to cover all these costs.
If you’re just starting your business and don’t have financial data to review, you can use projected costs. For example, if you’ve signed a lease for office space, use the monthly rent amount as your cost.
Step 2: Determine variable expenses
Variable expenses are costs that change from month-to-month. These can include utilities (example electricity bills), marketing costs, sales commissions or travel costs.
Variable expenses also include costs that can be adjusted based on situation or business performance. When business is performing well, money can be invested as a variable cost to expand the business faster. Conversely, if the business is not doing well, variable costs are the place to cut down on the budget.
Step 3: Estimate one time expenses
Many may forget about expenses that are not recurring monthly but are crucial for your business expansion. This part of the expenses are used for business growth related segments.
Included in this section may be setting a budget for creating a new e-commerce site, upgrading an existing website to a better performance, etc. Adding these to your budget can help you set aside the financial resources necessary to cover those expenses.
Besides, setting aside one time expenses will also allow you to cover unexpected incidents costs, such as a damaged laptop, broken office equipment… and the list goes on and on.
Step 4: Tally your income
Next, figure out all your income sources throughout the month and record them. If the income is most likely to be a fixed amount for your business, the figure will be easier to be captured. Some income may not be easily estimated by looking at previous trends and records, so take a range between the highest income amount and the lowest income amount received.
Remember not to put your business sales target amount in your income section as the sales target is a future figure to be achieved and not to be mistaken as a current income.
Step 5: Putting everything together
Once you have done all the previous steps, you can now list all of them together in one place. I would recommend listing them side-by-side for easier comparison. Here is the example of how I would list them.
On your business budget, you’ll want to tally your total income and your total expenses, then compare cash flow in (income) to cash flow out (expenses) to determine your overall business profitability.
|Income||Amount (RM)||Expenses||Amount (RM)|
|Sales income||50000||Fixed Cost|
|Web hosting & email||400|
|One time cost|
|Surplus / Deficit||26,900|
Looking at your business budget, if you notice your expenses are more than your income, you should either generate more income for your business or find ways to cut your variable expenses. On the flip side, if your business is performing well, and your profit greatly exceeds your total expenses, then you might consider investing back into your business in the one time expenses section. Upgrading your website, enhancing your website security and getting better equipment are some of the examples that can help your business grow.
One rule of thumb is keeping your costs low. Even if your income is weak, your cash flow is still healthy with low spending from your business.
It may be hard at first to plan and record expenses; however, things will get easier as, over time, you will understand more of your business cash flow. Once you have a clear sense of your monthly profitability, you can use it to make the right financial decisions for your small business moving forward.
Start planning your business budget for the new year 2021 – especially in the digital area. Business digitalization is the future for all businesses to thrive.