How To Create a Small Business Budget

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Creating a business budget? Keep the following smart small business tips in mind when creating your small business budget.

Business owners are always searching for ways to save on expenses. There is a constant need to conserve on every aspect of their businesses because money is often tight when starting and expanding a business.

This is the reason that 70% of small business owners fail in their 10th year in business, according to Fundera.

Many business owners have budgets in place, but others are unaware of ways to maximize their resources. Effective budgeting starts with the identification of profit margins and the proper allocation of expenses where they are most needed.

If you have issues incorporating a budget plan or require a new approach, the following budgeting tips will assist you with correctly budgeting for your business essentials.

Tips When Creating a Small Business Budget

Keep the following smart small business tips in mind when creating your budget.

Step 1: Make a Budget for Each Department

Even as a small business, there is a tremendous benefit to dividing the budget into several different categories.  For instance, you may wish to begin by creating an IT budget.

You may wish to follow up with your advertising and promotional budget plan. This approach helps keep your plan specific while also giving the team members in charge of the various areas more flexibility and responsibility. No matter how you break it up, each budget should incorporate the following steps:

  1. Tally Your Income Sources
  2. Determine Fixed Costs
  3. Include Variable Expenses
  4. Predict One-Time Spends
  5. Pull It All Together

Step 2: Don’t Underestimate Expenses

It is suggested that you round up your expenses rather than underestimate.  Underestimations result in overspending, and that can create accounting discrepancies.  This also reduces the impact of underestimation on your proposed budget.

Related: 6 Ways to Grow Your Business Fast

Step 3: Scrutinize Over All Expenses

While it is common for businesses to keep a watchful eye on larger purchases, the smaller expenditures often fly under the radar.  This lack of oversight can be costly because the small expenses accumulate rapidly. It is vital to pay close attention to every bill and invoice to make sure that you are not overspending in the slightest.

Step 4: Make Sure Your Projections are Realistic

Cash flow projections account for a majority of small business budgeting, rather than actual cash flow.  Making sure your projections are correct is crucial. The overestimation of your cash flow will only result in false expectations.

Revisit and Revise Your Budget Monthly While this may seem obvious, it is important to note that you cannot rely solely on the original budget without updating it. Revisit and revise your small business budget monthly with updated cash flow projections.

Step 5: Reward Team Members

It can be challenging to stick to a business budget, and often using bonuses to your team for meeting budget objectives is a good incentive. Having an employee rewards program is can be very beneficial for your small business. Even if you have no employees, giving yourself a bonus will also help.

Related: 6 Creative Ways to Finance Your Business

Step 6: Analyze Risks

Aside from offering yourself performance-based incentives, use additional measures for motivation.  Analyze the potential risks if you do not adhere to your budget. Include failure to make payments, missing payroll, and debt-to-profit ratio. Remaining mindful of the possible risks connected to failing to follow your budget is a motivating factor to help you stay on track.

Step 7: Plan for Major Purchases

When you are aware that there is a major purchase coming up, you make sure to prepare. Make sure you anticipate these purchases and save for them accordingly.

Step 8: Categorize Essential and Secondary Expenses

Some expenses are essential to businesses when getting started, such as business letterhead, business cards, etc.  There are also expenses like rent/mortgage, payroll, bills, and taxes that are required to maintain your business. Weigh those expenses with those that are not needed to stay in business.

While it is okay to purchase some non-essential things from time to time, it is essential to refrain from these purchases when finances are questionable.

Related: Best Business Websites That Are Helping Startups in 2021

Step 9: Address Business Debt

Debt can be a looming cloud that hovers over a business. When planning for your budget, identify where there is extra capital that can be allocated toward the paying off of debt.

Step 10: Initiate a Savings Plan

If you spend all your profits as soon as they come in, it will be impossible to prepare for the unexpected expenses that tend to arise. It will also make it difficult to scale and expand your business. These things require that your company maintains excess capital in anticipation of the unexpected. Setting some of your profits aside for these occurrences is advised.

Related: 11 Steps to Starting Your Own Business

Ready to Create Your Business Budget?

The best way to get started with your budget plan is to set aside some time and sit down and begin the planning process. You understand best how your company should operate.

You are also aware of the cost of the expenses that your company will incur during the various phases your business will undergo. After you have your small business budget in order to spend some time figuring out how you can best lower your business expenses.

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About the author

Brian Meiggs
Brian Meiggs is a personal finance expert, and the founder of My Millennial Guide, a personal finance site helping you put more money in your pocket. He helps millennials follow the smart money in order to increase their earning potential and start building wealth for the future. He regularly writes about side hustles, investing, and general personal finance topics aimed to help anyone earn more, pay off debt, and reach financial freedom. He has been quoted as a top personal finance blogger in major publications including Yahoo! Finance, NASDAQ, Discover, MSN Money and more.
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