One of the most daunting parts of being a business owner can be handling the financing and budgeting. A budget is a tool that can not only help you understand the nature of your business, but can help other investors and even finance providers relate to your business as well. Even your business staff may find your budget useful to understand the direction your business plans to take. However budgeting for your business doesn’t have to be as much as a task as it seems. In fact, it can be broken down based on two financial formats.
The first financial format is your income statement, which covers understanding your income sources. The second is creating a cash flow statement which includes your fixed costs, variable costs, and other one-time expenses.
Understand your Income Sources: Where your income comes from depends on your business. While the income for some businesses come from invoices, others can come from direct sales.
If your business uses invoices, make sure all your dues from your clients are met. Learn more about invoice financing here if this has been a problem for you. If your business works off direct sales, you may need an alternative source of financing to maintain your cash flow. This can help stock up on inventory, plan for marketing, hiring staff, or any other expense you’ll need to budget for but do not have the immediate money to accommodate.
Total up all the sources of your income. This number will let you know how much profits your business has made, and what your budgets need to work with. Don’t be alarmed if your business isn’t bringing in the number that you expected. If your business is only a few months old, you’ll need more time to establish a loyalty base with customers.
If your business is seasonal, consider taking a side business during the rest of the year. A business that can teach a useful skill can help you become better at your seasonal business as well. It’s a great way to get some extra money for your budget as well.
Once you’ve tallied all your income together, this is the base amount from which you will need to subtract all your expenses and work on your budget with the rest.
Overhead Business Costs: The first expense to subtract from your total income is the fixed costs to run your business. This includes rent, utility bills, insurance premiums and loan payments. Some expenses like staff salaries can have both a fixed and variable component so make sure these are split as such for your calculations.
For example, if your employees deserve a bonus or you’re planning a promotion in the coming year for them, include the hike amount as variable while their current base salary remains the fixed cost. Asset-heavy industries such as trucking and auto-repair may have greater fixed-costs than labour-intensive industries. A comparison of fixed costs is only relatable when it is within the same industry, and high or low ratios can be fixed accordingly.
Variable Costs: Your variable costs include anything that doesn’t have a fixed cost every month.These can vary based on your business, sales and volume of transactions. You can reduce your variable costs to increase your profit margins In case of special seasonal months you may have to increase your business marketing which should be included as a variable cost.
One-time Costs: Plan ahead for one-time costs no matter how small they are. It could be staff you wanted to hire, or some renovation you wanted to get done, note down the one-time costs as an expense for your business.
If your business has been operational for over a year, your last year’s profits and downfalls can help you fix this year’s numbers. Save up all the receipts of your transactions, preferably digitally so you know the exact business costs your business has faced.
While your budget and expenses can be planned similar to the one you’d created the year before, there are some variables you may need to consider for the future budget you’re planning.
Business Risks: New policies and laws can change the business risks each year. Changes in health care, or tax regulations are factors to consider in the upcoming year. This is an impressive way of planning for your business budget and cuts down on any unexpected costs. Understand more on how planning for risks can save you money in the long run.
Overestimate your Expenses: It’s better safe than sorry so go ahead and project expenses a little higher than what you think they’ll be. Factor in inflation or any other cost changes as you do this and increase a little more for your budget. Additionally, every project you take on may have varying costs.
Study Your Sales Cycle: Every business goes through periods of peak sales and slumps. Study your business cycle to prepare for months during which your business may slow in vigor. You’ll need to accommodate your budget for boosting your business during these periods as well, and plan for the cycle of sales you’re business will receive ahead.
Finally, saving is the most critical part to budgeting for either your business or personal finances. The more expenses you’re able to cut down, the more you can save and re-invest in your business. In case of any immediate or unexpected expenses, don’t be too worried. You can always take a funding option to help you out. Happy Business to you!