In last months blog post, we took a good look at just how important a business strategy is. If you’ve not read that blog post, we definitely encourage you to take a look at it, which you can do so by clicking here – Developing your Strategy – Part 1.
In today’s blog post, we’re going to look at the 5-step plan we hand to our clients when it comes to them creating a budget for their company.
Understanding where the dollars go
A lot of businesses, and especially start-ups, don’t really evaluate where their money goes. This, as you can imagine, can cause some issues. So let me ask you; have you ever evaluated where every single dollar of your budget goes? When a company gets round to doing this, a lot of them are left in shock as they soon discover that most of the earnings left over after paying the major business expenses are being spent on things that simply aren’t necessary. But that’s not where the fun ends. A lot of businesses we’ve consulted have also told us that their monthly income was never increasing, even though the work they had to generate was.
It’s at this point where a business turns to us and utters the words “help us build our budget”. A good budget gives you the room to afford the things your business needs to grow, while simultaneously helping your firm gain greater profits as you’ll be able to see where your money is going.
Step 1: Tally Your Income Sources
The first element of a good business budget is figuring out how much money you bring in on a monthly basis. We strongly suggest that you start with your sales figures first. You can find your sales figures in your P&L (Profit and Loss report). If you’ve got any additional income streams, add them to the tally.
Step 2: Determine Fixed Costs
The might “Fixed Costs”! But what are fixed costs? In a nutshell, fixed costs are expenses that are charged the same price each month. As you can imagine, incorporating these is by far the easiest part of creating your business budget as you’ve most likely got a fair few where the price remains the same, e.g. rent. Check out your past bank statements to find your fixed costs. You’ll easily be able to spot your fixed bills and the total amount they cost you each month.
Step 3: Variable Expenses
If you find items that don’t have a fixed price tag each month, we call these things “variable costs”. Many of these purchases can actually be scaled up or down depending on the state of your business, using your monthly profit. Your profit each month will be determined by the earnings you’re left with after paying all your costs. So, if your business does better than you forecasted, you can use the extra funds to increase variable spending enabling you grow faster. Great, huh?
Step 4: One-Time Spends
When it comes to formulating a budget, you’re going to have to be able to factor in one-time purchases. There will be times when ad hoc expenses come out of nowhere, but that is to be expected, especially if your laptop crashed and you desperately need to buy another one. Being able to predict one-time spends is super important. As you create a few budgets, you’ll become a wizard at predicting one-time or ad hoc spends.
Step 5: Pull It All Together
The first four steps of this post detail the elements of a good business budget, so the last step is simply pulling it all together. Take action by using this handy checklist with specific examples so you can create your budget without any hassle:
- Hourly Earnings
- Product Sales
- Investment Income
- Government and bank fees
- Cell phone
- Website hosting
- Accounting Services
- Legal Services
- Raw Materials
- Contractor Wages
- Other Marketing Costs
- Travel & events
- Printing Services
- Office Supplies
Creating a monthly business budget may seem like a hassle, but I bet it’s something you’ve been thinking about for a long time. Take the leap! It’s an essential infrastructure project that gives you the ability to make conscientious financial decisions so your business can stay on track and growing.
What else stands in your way of a balanced business budget? Are there any hurdles we’ve missed that currently have you paralyzed in the process? If so, comment below with your questions, challenges or concerns.