You’ve just purchased or opened a small business and you know your trade. But when it comes to bookkeeping – and more specifically, budgeting – your skill set is lacking. The good news is that it is possible to come up with a budget, or at least a good estimation of what will be needed in terms of dollars and cents fairly easily.
Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in, or conversely, not spending enough money to grow the business and compete.
Getting Started with a Budget
Every business owner tends to have a slightly different process, situation, or way of budgeting. However, there are some parameters found in nearly every budget that you can employ.
For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, cost of goods sold expenses (raw materials), interest and tax payments. The point is every business owner should consider these items and any other costs specifically associated with the business when setting up shop or taking over an existing business.
With a business that is already up and running, you can make assumptions of future revenue based on recent trends in the business. If the business is a startup, you’ll have to make assumptions based on your geographic area, hours of operation and by researching other local businesses. Small business owners can often get a sense of what to expect by visiting other businesses that are for sale and asking questions about weekly revenue and traffic patterns.
After you’ve researched this information, you should then match the business’s revenue with expenses. The goal is to figure out what an average weekly expense for overhead, utilities, labor, raw materials, etc. would look like. Based on this information, you may then be able to estimate or forecast whether you’ll have enough extra money to expand the business, or to tuck away some money into savings. On the flip side, owners may realize that in order to have three employees instead of two, the business will have to generate more in revenue each week.
These six simple tips will help you put together a top-notch small business budget:
1. Check Industry Standards
Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the internet for information about the industry, speak with local business owners, stop into the local library, and check the IRS web site to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings.
Small businesses can be extremely volatile as they are more susceptible to industry downturns than larger, more diversified competitors. So, you only need to look for an average here, not specifics.
2. Make a Spreadsheet
Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It’s a good idea to contact any suppliers you’d have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc. (For more ideas on setting up a budget, read “Budgeting Basics: How to Set Up a Budget.”)
3. Factor in Some Slack
Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it’s wise to factor in some slack and make sure that you have more than enough money socked away (or coming in) before expanding the business or taking on new employees.
4. Look to Cut Costs
If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting. Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide the business owner with much needed breathing and expansion room.
5. Review the Business Periodically
While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.
(To learn more, see “Establishing Budget Goals.”)
6. Shop Around for Services/Suppliers
Don’t be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.
The Bottom Line
Budgeting is an easy, but essential process that business owners use to forecast (and then match) current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid emergency fund.