If you don’t have a budget for your small business, don’t worry. You’re not alone. In fact, half of small businesses run without a budget. Why? Because many business owners suspect that even if they make a budget, they won’t be able to stick to it and it will be a waste of time. Fortunately, this is a myth. Small businesses who make budgets generally stick to that budget and come in on or under budget.
So what are you waiting for? Let’s dive in and explore the ways budgeting can inform your business decisions, save you money, and help you find peace of mind.
Why is a Budget Important for a Small Business?
Many people start small businesses because they do not want to feel beholden to anyone. For many of these small business owners, budgeting can seem like a return to their unpleasant past in other companies.
However, budgeting is essential to all companies, no matter how small, especially during the Covid-19 pandemic. Read our blog post about budgeting during the pandemic to learn how budgeting can save your company money.
Here are just a few more reasons that budgeting is essential to small businesses.
Business budgeting helps you identify areas for savings or revenue
As you create your small business budget, look back on your company’s financial statements from the past few years. These statements will help you find areas where you could save money or make extra revenue. For more information on how to analyze your financial statements, read our article about financial reporting here.
Once you have decided where you would like to save money or increase your revenue, use your budget to show the impact on paper. If you formally resolve to make those changes using your budget, you are more likely to stick to those changes.
Budgeting Helps with Sound Financial Decisions
Businesses that create budgets rely on their heads rather than their hearts to make decisions. Rather than relying on instinct to make big decisions, business owners with budgets make their decisions based on data.
When it comes to your business finding investors or applying for grants, it is always important to a plan to show your potential investors or grant committees that you make decisions responsibly. Showing them that you are good at creating a budget and stick to it, you are more likely to impress.
Business Budgeting is an Overview of your Business’ Finances
Having a clear record of your business’s finances is useful for many reasons. As I mentioned above, it can help you gain investor trust, but that is not where the benefits stop.
By creating budgets yearly, you will have a clear picture of how your business’s spending has changed over time. This will help you analyze the trajectory of your business.
Moreover, a clear budget lays a solid foundation for your small business’s future. When you plan and manage your money wisely, you set yourself up for success. With a clear budget, you can anticipate and prepare for potential financial challenges, ensuring that you’re equipped to tackle any ups and downs that come your way.
This strategic foresight not only promotes stability but also empowers you to make informed decisions. Consequently, whether you’re navigating unexpected expenses or planning for growth, a well-structured budget becomes an indispensable tool in steering your business towards financial health and sustainability.
Business Budgeting Helps Manage Cash Flow
Creating a specific budget for your small business will help you manage your cash flow. Cash flow budgeting is a style of budgeting that is different from traditional income statement planning. When you create a cash flow budget, you will need to create a specific list of all cash inflows and outflows that you expect. For instance, items like debt payments don’t show up on the income statement and as such, may not be properly reflected if you don’t budget your cash flow as well.
This will give you a sense of the cash flow you can expect from your business. Such an estimate can be incredibly helpful for businesses that struggle to stay out of the red. William Edwards from Iowa State University gives a overview of cash flow budgeting here.
Budgets Help Your Business Be More Prepared
To prepare for unexpected financial opportunities in a small business, it’s crucial to have a comprehensive budget strategy. Start by outlining your expected revenue to understand what resources you have available. This will help you determine how much can be allocated towards potential opportunities.
Next, clearly list your operating costs and any one-time expenses you may anticipate. This step ensures that essential business functions remain unaffected, even when opportunities come knocking.
Don’t forget about taxes—setting aside funds for these obligations is a must to avoid any compliance issues down the road. To fully prepare for the unexpected, establish a contingency fund. This safety net will empower you to seize exciting opportunities as they arise without jeopardizing your financial stability.
Here’s a quick checklist to keep your finances in check:
- Revenue Assessment: Determine your income projections to know what’s available.
- Expense Management: Account for regular and one-off costs.
- Tax Readiness: Allocate funds to stay compliant.
- Contingency Planning: Set aside a flexible reserve for unforeseen opportunities.
By following these steps, your business will be poised to take advantage of financial opportunities and grow in unexpected ways.
Budgets Help to Identify Challenges and Scale Your Business
By creating a budget, you will be able to predict how quickly your business can grow. You can also identify factors that may stand in the way of your business growing quickly.
Remember though, if you want an accurate sense of how much your business can grow in the next year, you will need to create an accurate budget. Your budget must be achievable. Your small business budget must be created with realistic expectations.
How to Create a Business Budget
“Great!” You may be thinking. “I’m ready to create my business budget, but where do I start?” Don’t worry. We will outline some easy steps to create a great business budget here. We also have another article with tips on how to create a budget for your business.
Quick Steps for Creating a Business Budget
There are four steps to creating a simple business budget. Remember, your budget should be simple and easy to stick to. You can think about it as a diet. If your business budget or diet is overly complex and ambitious, you probably won’t stick to it.
- Revenue Projections
First, you will need to predict how much money your company is likely to make next year. You should base this on past financial reports. Consider all potential income streams, not just traditional sales.
- Sales: Analyze past trends to anticipate future sales figures. Look at seasonal patterns and market fluctuations.
- Services: If your business offers services, evaluate contracts and client relationships to project service-based revenues.
- Other Sources: Don’t overlook alternative income sources such as partnerships, intellectual property, or investment returns. These can significantly impact your budget.
By incorporating these diverse revenue streams, you’ll develop a comprehensive understanding of your potential earnings, providing a solid foundation for your budgeting process.
- Variable Expenses
Next, you will need to calculate your variable expenses. These are expenses that will change month-to-month, but you can average them out throughout the year. For example, gas for company vehicles is a variable expense, and you will have to average the cost of gas over a few months to get a good estimate.
- Fixed Costs
Fixed costs will remain constant each month. Examples of fixed costs include rent, utilities, and the cost of certain software.
- One-Time Expenses
Finally, you will need to calculate those big, ambitious purchases that your business hopes to make in the coming year. Perhaps you need a new copier or a new work truck. These are your one-time expenses.
In addition to these steps, it’s crucial to plan for other important financial elements:
- Taxes: Allocate funds for federal, state, and local taxes, including income tax, sales tax, and payroll taxes, to avoid any surprises.
- Contingency Fund: Set aside a portion of your budget for emergencies or unforeseen circumstances. This will provide a financial cushion when unexpected costs arise.
By incorporating these elements into your budgeting process, you ensure a comprehensive financial plan that prepares your business for both expected and unexpected financial obligations.
Don’t Just Budget Your Income Statement
It might be tempting to simplify your budget as much as possible. Simply try to predict how much income your company will take in next year. However, when you go too simple, you miss out on important parts of the budget that can tell us a lot about where the business is going.
Project Net Cash Flows
As I mentioned above, a strong budget should project cash inflows and outflows to create a picture of where the company will spend and gain money in the coming year. By being specific, we can break down the larger budgeting goals into small, achievable goals that are easier to handle and stick to.
Project Your Balance Sheet
Your balance sheet is a financial report that contains a record of all of your business’s assets and liabilities. At the end of the year, you can use the balance sheet to project how much money your business would have if it paid off all of its liabilities and sold its assets. To learn more about your balance sheet, read our article on financial reporting here.
In your budget, you should project your balance sheet for the next year, considering what assets you hope to acquire throughout the year and how much of your liabilities you hope to pay off. By projecting your balance sheet, you can create a detailed financial plan that suits your goals. For example, if your goal is to become more independent as a business, you could create a plan where you pay off as many of your liabilities as you can.
Budgets Need to Be Flexible Throughout the Year
Let’s return to the idea of a budget as a diet for your business. Even when we create a diet that should be simple and easy to follow, sometimes we slip up. The most important question is: “what do we do then?” Although some may throw up their hands in despair, smart dieters will take the failure as an opportunity to adapt.
Similarly, clever budgeters need to recognize that they will not always follow their budget. They need to plan to adapt their budget throughout the year. We suggest that you reassess your budget at the end of each quarter, and if you find that you are going severely under or over your budget, you should adjust.
Why Setting Aside Funds for Taxes is Crucial in a Small Business Budget
Managing finances in a small business can be complex, but one of the key components that require careful planning is taxes. Allocating funds specifically for taxes is essential for several reasons:
Avoid Unexpected Financial Strain
- Predictability: Regularly setting aside money for taxes ensures that you are financially prepared when tax season arrives. This practice can prevent the surprise of large, unplanned expenses that might disrupt your cash flow.
Ensure Compliance and Avoid Penalties
- Compliance: Meeting tax obligations promptly helps you avoid costly penalties, fines, and potential legal issues. Both federal and state tax agencies expect timely and accurate payments, and failing to comply can damage your business’s reputation and financial stability.
Streamline Financial Planning
- Budgeting: By planning for taxes within your budget, you can make better business decisions. Knowing how much you need for tax obligations allows you to allocate resources more effectively, promoting smarter spending and savings strategies.
Reduce Stress
- Peace of Mind: Knowing that your tax obligations are covered can significantly reduce the stress associated with financial management. This relief frees up mental energy to focus on growing other aspects of your business.
In summary, an effective tax strategy involves integrating tax preparation into your regular financial planning. By doing so, you not only safeguard your business against unexpected financial hurdles but also enhance your overall financial health.
The Importance of a Contingency Fund in a Small Business Budget
A contingency fund is a vital component of any small business budget. It serves as a financial safety net, prepared to cushion the business against unforeseen challenges. But what exactly makes it so crucial?
1. Handling Unexpected Expenses
Despite meticulous planning, unexpected expenses can arise. Whether it’s sudden equipment failure, a spike in utility costs, or emergency repairs, these can quickly drain resources. A contingency fund ensures that your business can address these issues without disrupting operations.
2. Managing Economic Fluctuations
Economic conditions can be unpredictable. Market downturns, changes in consumer behavior, or new regulations can affect revenue streams. Having a financial reserve allows a business to navigate these economic shifts without undergoing drastic measures like layoffs or service reductions.
3. Safeguarding Against Revenue Shortfalls
Not every month will hit revenue targets. Seasonal changes or unexpected drops in sales can occur. Contingency funds help bridge the gap during lean periods, ensuring that essential expenses such as payroll and utility bills are covered.
4. Enabling Strategic Investments
Opportunities can arise unexpectedly, such as a chance to purchase discounted inventory or invest in promising technology. Access to contingency funds can provide the flexibility to seize such investments without straining the regular budget.
5. Boosting Peace of Mind
Finally, knowing there is a buffer against the unknown instills confidence in business decision-making. It allows small business owners to focus on growth and long-term strategies instead of being preoccupied with financial uncertainties.
In summary, a contingency fund acts as a business’s back-up plan, supporting both stability and growth by preparing the enterprise for whatever the future may hold.
Business Budgeting Helps You Identify Areas for Savings or Revenue
As you create your small business budget, look back on your company’s financial statements from the past few years. These statements will help you find areas where you could save money or make extra revenue. For more information on how to analyze your financial statements, read our article about financial reporting here.
Once you have decided where you would like to save money or increase your revenue, use your budget to show the impact on paper. If you formally resolve to make those changes using your budget, you are more likely to stick to those changes.
Budgeting Helps with Sound Financial Decisions
Businesses that create budgets rely on their heads rather than their hearts to make decisions. Rather than relying on instinct to make big decisions, business owners with budgets make their decisions based on data.
When it comes to your business finding investors or applying for grants, it is always important to have a plan to show your potential investors or grant committees that you make decisions responsibly. Showing them that you are good at creating a budget and sticking to it, you are more likely to impress.
Business Budgeting is an Overview of Your Business’ Finances
Having a clear record of your business’ finances is useful for many reasons. As I mentioned above, it can help you gain investor trust, but that is not where the benefits stop. By creating budgets yearly, you will have a clear picture of how your business’s spending has changed over time. This will help you analyze the trajectory of your business.
Business Budgeting Helps Manage Cash Flow
Creating a specific budget for your small business will help you manage your cash flow. Cash flow budgeting is a style of budgeting that is different from traditional income statement planning. When you create a cash flow budget, you will need to create a specific list of all cash inflows and outflows that you expect. For instance, items like debt payments don’t show up on the income statement and as such, may not be properly reflected if you don’t budget your cash flow as well.
This will give you a sense of the cash flow you can expect from your business. Such an estimate can be incredibly helpful for businesses that struggle to stay out of the red.
Budgets Help to Identify Challenges and Scale Your Business
By creating a budget, you will be able to predict how quickly your business can grow. You can also identify factors that may stand in the way of your business growing quickly.
Remember though, if you want an accurate sense of how much your business can grow in the next year, you will need to create an accurate budget. Your budget must be achievable. Your small business budget must be created with realistic expectations.
In conclusion, effective financial management through budgeting not only helps in allocating resources and managing cash flow but also sets a firm foundation for achieving your financial goals. Whether you’re aiming to save money, make informed decisions, or scale your business, a well-structured budget is your business’s financial compass.
Professional Budgeting Help
Even the savviest small business owner needs help with finances sometimes. This is because small businesses cannot afford to hire a full-time CFO to create a budget for the company and make sure that the company is sticking to it. Fortunately, there are many ways that your small business can get help with the budgeting process.
Hire a CFO
If you can afford it, hire a CFO to manage your business’s budget and financial statements. Bringing on someone new in your company is always a big choice, but in this case, it often pays off handsomely because a CFO will help you clarify your financial priorities and save money.
Some companies, like Krieger Analytics, offer virtual CFO services. These services allow companies to outsource their CFO work, allowing them to reap all of the benefits of having a CFO without the intimidating price tag.
First-Year Help
When it comes to budgeting and financial reporting, the first year is the toughest (and the most important). Consider getting professional financial planning help for the first year, so that you can watch someone create a budget and analyze the financial reports before you do it yourself next year.
If you want to employ this strategy, hire an accountant who is willing to collaborate with you on the budget so that you can see them in action and learn as much as possible while they are there. Some accountants may be able to help you create a budget template that you can create year after year.
Using a custom-created budget template will be especially helpful if it was created within a specific five or ten-year plan for your company’s finances.
Templates
If you don’t have the money for someone to help you for the first year of budgeting, don’t worry, you’re not alone. There are lots of templates for budgets online that can get you started creating your first budget. Many of these templates also come with online videos to help you create your perfect budget.
Using a sample business budget template can greatly simplify the budgeting process. Here’s how:
- Clear Plan: Templates provide a structured plan, ensuring you don’t overlook important details.
- Ease of Use: Simply fill in the blanks with your numbers, making the process more organized and less daunting.
- Reusability and Adaptability: You can reuse templates for future budgets or adjust them to suit different needs, saving time and effort.
- Pre-set Categories: With categories already set up, you just need to input your numbers in the right places, reducing the chance for errors.
However you choose to create your budget, whether you hire outside help or learn how to do it yourself, the most important thing is that you have created a budget. Now, you need to adapt that budget throughout the year and stick to it as much as possible. If you can do these three things, you are on your way to financial success.
Overall, using a sample business budget template offers a roadmap, helping you save precious time and effort while ensuring a more accurate and effective budgeting process.
At Krieger Analytics, we want to help you with all of these steps as much as possible. So follow our blog for more tips on budgeting and consider scheduling a free consultation call with the folks at Krieger Analytics to learn how we can help you create the perfect budget.
