A business budget is essential!
Before you make money, you need to figure out how to spend it properly. It's an essential business tenet.
To ensure money goes where it should, there is one thing you must do: create your business budget.
With a budget, you can easily track business expenses, cash on hand, and the revenue needed to ensure your business grows or stays afloat.
Nowadays, it is also reassuring to know there is no shortage of Excel templates you can use to ensure you have all the budgeting bases covered.
An expense report template, for instance, is a tool that can effectively track business spending. Other tools can also help you anticipate spending, future needs, and cash flow.
Business Budget in a Nutshell
Simply put, a business budget is a detailed plan that allows you to outline where you will spend your money monthly or annually. A budget can help you with the following:
- Forecasting the amount you expect to earn
- Planning where your revenue should be spent
- Analyzing the difference between your plan and your current reality
Seven Components of a Good Budget
Ideally, your business budget should be straightforward and flexible. In case circumstances change, your budget should give you a clear picture of where you stand.
Your budget should include the following key components:
1. Estimated Revenue
Estimated revenue is the amount you anticipate to make from the sale of your goods or services.
Estimated revenue is the cash you bring in the door and should be the first line on your budget.
This can be based on last year's figures. If you are a startup, you can base it on industry averages.
2. Fixed Cost
Fixed cost refers to consistent costs that won't change regardless of how much you make.
Examples of fixed costs include insurance, bank fees, utilities, rent, equipment leasing, legal services, and accounting.
3. Variable Costs
Variable costs can change depending on sales volume or production.
Variable cost is closely related to the cost of goods sold.
This can include production cost, shipping, inventory, packaging, and raw materials. Other variable costs include credit card fees, sales commissions, and travel.
4. One-Off Costs
One-off costs are those things that fall outside the typical work your business does.
These are startup costs like equipment, software, moving offices, etc. Other costs that are related to research and launch belong to one-off costs.
5. Cash Flow
Cash flow is the money that travels in and out of your business.
If more money comes in than goes out over a set period, you have positive cash flow.
Since cash flow is considered the lifeblood of every business, it is crucial that it is monitored weekly or at the very least monthly.
Profit is what you take home after deducting all your expenses from your revenue.
If the difference between your expenses and revenue is not to your liking, you need to rethink the cost of your goods and perhaps consider increasing your price.
7. Budget Calculator
This is another helpful tool that can help you see where you stand in terms of business budget planning. If anything, having all your numbers in one place can be beneficial.
Create a summary page for each of the critical categories mentioned above. This is your business budget's basic framework.
Next to each category, list down the total amount you intend to spend.
Create another column to the right and use it to list down the actual amount you have spent.
This setup can give you a quick snapshot of your business budget without requiring you to dive into multiple layers of spreadsheets.
A business budget template can be as complex as a multi-page spreadsheet or as simple as a table. Regardless of what you prefer, you need to create something you are comfortable using.
Ideally, you need to create a yearly budget; a 12-month budget is considered standard. It is also recommended that you do quarterly or monthly check-ins to ensure you are on the right track.
Budget Templates for Different Types of business
While every good budget template shares the same framework, it is recommended that you consider your industry and business type when creating your budget.
If your business has a slow and busy season, having a budget is doubly essential. Since business is not consistent each month, a budget can give you a clear insight into past and present data.
Why is this important? It can help you predict future cash flow.
Forecasting this way can also help you see how much you need to get through the slow months, what the annual trends are, and when you can cut costs to offset the low season.
The primary budgeting factor for e-commerce is shipping. It is important to remember that potential import duties and shipping costs can have a significant impact.
Check if you have space in the budget to cover customer shipping. If not, do you have a strategy that's aligned with your budget?
Since packaging can also affect shipping rates, it is recommended that it is also factored into the cost of goods sold. While you are at it, also consider warehousing duties and costs.
To create a great online shopping experience for your customers, it is ideal that you factor in web design, advertising, product photography, and a good web hosting service into your budget.
Understandably, budgeting can be tricky for startups since they rarely have a model to work from.
If you are running a startup, do your due diligence by researching industry benchmarks for marketing costs, rent, and salaries.
You also need to know what to expect to pay for benefits, equipment, and professional fees.
Also, set aside a portion of the budget for advisors — lawyers, accountants, bookkeepers, etc. Investing a few thousand dollars upfront might save you thousands more in legal fees down the road.
You can liken budgeting to dreaming: it's mostly pretending. However, as soon as you start pulling accurate historical financials and when you get to check the budget you have set against real numbers, that's when you will see how valuable and magical a budget can be.
ACTION ITEM: Before we close out this post I want to give you one little action item! Comment below with ONE thing you learned from this post and how you're going to put it into ACTION.
Enjoy the rest of your day.