Business Planning: 4 Tips to Create a More Effective Budget
Budgeting for your business is a lot like budgeting for your household. However, the stakes are very different. If your budget is off, you run the risk of operating in the red. Running your business at a loss will eventually lead to closing your doors.
One of the first steps in creating a successful business is creating a budget that works for your needs. A good budget will accurately estimate costs, income, and create a buffer for unexpected expenses or drops in revenue. For many businesses, the process can be very complicated. Using the following tips can help you create a budget that works for your needs.
- Know where ALL of your income originates.
A budget always starts with knowing the income that you have to work with to pay expenses. While this step pretty self-explanatory, some business owners overlook income sources that may not be as obvious. For example, if your primary service is computer repair, but you also occasionally sell refurbished computers, you should also include the income that you receive from reselling computer parts as well. Track where the revenue is coming in so you know what your most lucrative services or products are. This type of information will not only help you budget, but it will help you plan for the future as well.
- Divide your costs to estimate them easier.
Costs can be divided into three categories: fixed, semi-variable, and variable. Fixed costs are the easiest to estimate, and you should start with those costs when calculating your monthly, quarterly, or yearly expenses. Then, use historical figures to estimate variable and semi-variable costs if they are available. If you are just starting out, you may be able to gather this type of information from similar businesses or online research. It is better to err on the side of over-estimating when it comes to costs.
- Build in a buffer.
It’s always a good idea to have a cushion between the total amount of your income and your expenses. Having this contingency fund will help you have cash should an emergency arise. Keep in mind that this buffer should be used to address less than ideal sales as well as increased costs. Sometimes thinking of the buffer in terms of decreased income instead of higher expenses will change how much the contingency fund should be.
- Review and adjust.
You should review your budget periodically and make adjustments as necessary. Some businesses choose to do this on an annual basis, while other companies can wait a couple of years to make changes. You should also be reviewing the budget to determine how you are doing with staying in your expenses on a monthly basis. Regardless of the time in between your review, you be sure to do it regularly.
Having and maintaining a budget is one of the best ways to ensure that your business’s cash flow is consistent and appropriate so that you do not run into financial troubles. If problems arise, speaking to Maxwell Dunn about options for your business is a good idea. Contact us to learn more.See all videos