How can it be the third week of January already? Time flies, especially if you’re a small business owner. The beginning of the year entails a lot of work, from setting business goals and resolutions to building your business budget.
But the latter often seems a mysterious endeavor. You may know your business objectives, but the budget needed to achieve it remains murky. Good news—that doesn’t have to be your forever reality. With the six steps outlined here, you’ll succeed not only at business budget planning but also at reaching business targets.
1. Identify Your Sources Of Income
You should begin business budget planning by identifying all your income sources. Many probably come from sales, but others could exist. Your job is to outline the sources and corresponding dollar amounts. They first tally the total income, which plays a role in determining profits and spending power. Second, they offer a benchmark from which to project future sales and company growth.
Pro Tip: Not sure what counts as an income source? Keep the following five in mind to get started: hourly earnings, product sales, investments, loans, grants and savings. Not all will apply to your small business, but they give an idea of where to start when it comes to detailing monthly, quarterly and annual income.
2. Determine Fixed Expenses
Next, list your fixed expenses. Some are obvious: rent, utilities and payroll. Others may come as a surprise, particularly if they occur infrequently. For example, a marketing consultant would be a fixed expense, but you might only visit with one every three months or so.
Pro Tip: If you haven’t already, set up a business banking account. It’ll keep personal finances and expenses separate from business ones. You should also invest in accounting software. It can sort many transactions for you, keeping the books straight and delivering a profit and loss statement at a glance.
3. Include Variable Expenses
Third, you should develop an itemized list of variable expenses, i.e., the ones you know are coming but can’t accurately estimate. Quarterly taxes serve as an example. You know you’ll pay them every three months, but the amount might change because of business performance.
Pro Tip: Remember the other “variables.” They include things like advertising, printing costs, subcontractor wages, travel and event fees, commissions and raw material costs.
4. Forecast One-Time Spends
While tallying income sources and expenses, you should consider one-time spends. These items typically grow the business. Examples include purchasing additional inventory in preparation for spring sales or buying equipment so that you can produce more products, faster.
Pro Tip: You should do your best to identify one-time expenditures early so that you can a) budget for them and b) develop a plan to obtain them. If you know new equipment will grow the business but don’t have the funds on hand to purchase them, you can decide to seek working capital from a financial institution or online lender like RapidAdvance.
5. Create A List Of Risks
Fifth, you should create a list of risks. Some of them you know and probably accounted for when starting the business. Others develop over time, as in the case of health insurance. You should list each risk and its potential financial impact on the company. You should then prioritize those risks, decide how to manage them and set aside funds to cover them.
Pro Tip: Risk management plans sound complex, but the process for them is actually quite simple. You begin with a list of risks and consequences. Next, you figure out the probability of the risk’s occurrence and its financial impact. The sum of those two numbers determines the priority level for the risk. With it in hand, you can decide on a response: avoidance, acceptance, limitation or transference.
6. Combine The Information
You identified income sources. You also outlined expenses and expenditures. Now, you simply need to combine the data to build a business budget. With the big picture documented, you can get to work on turning your 2017 business goals into realities.
Pro Tip: First, add up your income sources. Second, add the expenses together. Now subtract the second from the first. The difference shows your actual annual profit or loss.
Finally, remember that a budget is a living organism. You should review it every month so that you accurately report and forecast for the next month and year. Doing so will keep you out of the red and safely in the black.