Small Business Budget Tips and Strategies for Success
Running a small business is hard work; without sound financial planning, unexpected expenses or other surprises can make things even more challenging.
Luckily, budgeting for small business overhead, inventory, labor, and equipment is relatively simple once you grasp the basics of how it’s done.
Here are the fundamentals of small business budgeting, including key types of budget calculations and how to create a standard small business budget from scratch, step by step.
Why Do Business Owners Need a Budget?
Creating a budget is essential to accurately estimate the costs of running a business. By carefully mapping out projected expenses against expected income, business owners can make better financial decisions associated with expanding operations, hiring new employees, and ensuring sustainable profitability in the future.
Without properly budgeting small business expenses, costs can quickly begin to take an increasing share of revenue, which can stifle growth and threaten the long-term stability of your company. Unless you track and manage costs regularly, your business could encounter numerous financial obstacles that could lead to downsizing, layoffs, or even bankruptcy.
What Are the Essential Steps of Building a Business Budget?
Before creating a budget for your small business, ensure that all your financial records are readily accessible and in order. After collecting all the necessary information, including income statements, employee pay stubs, invoices, and vendor orders, you can start building a yearly budget.
While it’s possible to simply create a budget from scratch using an Excel spreadsheet, you may be able to save some time by searching online for a ready-made business budget template.
Follow these critical steps to build a comprehensive budget you can depend on to keep your business running smoothly.
Evaluate All Your Sources of Revenue
Start by adding revenue streams associated with your business. This should include gross sales of products and services rendered online or in the physical store. Other revenue sources include subscriptions for customer memberships and convenience fees for financial transactions.
Your income statement will vary depending on sales volume each month, so you’ll want to examine revenue from a quarterly or year-to-date standpoint to get an accurate idea of how much your business is making.
Calculated Fixed Costs
Once all your revenue is accounted for, you’re ready to move on to calculating all the fixed costs associated with running your business.
As the name suggests, fixed costs remain the same from month to month. It may include expenses like rent, electricity, internet, water, garbage, salaries, or payments on any active business loans.
For e-commerce businesses, other fixed costs like domain name fees and website maintenance costs should be included. Those who have a brick-and-mortar location or a vehicle fleet will also want to calculate fixed costs like property and automotive insurance premiums.
Calculate Variable Expenses
Next, it’s time to add all your business's variable expenses throughout the year.
These costs fluctuate monthly and include piece-rate wages, shipping fees, raw material procurement, and sales commissions. If your business relies heavily on shipping items to customers for revenue, you’ll also want the costs of packaging supplies like boxes, bubble wrap, tissue paper, and tape.
Additional variable expenses to calculate include credit card processing fees and sudden expenses like plumbing or HVAC repair.
Small businesses tend to overlook estimating expenses for marketing budgets, which can change throughout the year, so don’t forget to include these variable costs in your calculations.
Create an Emergency Fund for Unexpected Costs
Surprise events like vandalism, inventory theft, property damage, or equipment failure can put a serious financial strain on small businesses.
It’s a good idea to set aside a portion of revenue each money to build an emergency fund for these types of unforeseen expenses. Ideally, emergency funds should be substantial enough to cover overhead expenses for several months.
Access to this safety net will insulate your business from cash flow problems that can slow down operations and undermine growth.
Determine Your P&L (Profit and Loss)
Another key component to any small business budget is the P&L, or profit and loss.
In short, profit and loss statements are created by subtracting total expenses from your business's net profit. Depending on how your business is structured, you may also need to calculate income taxes and include this estimate on the loss side of your statement.
Budget for the Future
While a budget helps provide insights into the past financial performance of your small business, it can also help you make more informed decisions in the future.
For instance, if you notice that there are months when expenses exceed revenue and maintaining healthy cash flow is an ongoing challenge, you may consider creating a static budget that accounts for these fluctuations.
Budgeting for the road ahead is also less daunting once you write a business plan that includes sales projections and expense estimates over a three-to-five-year time frame.
Chat With Suppliers About Costs
Take the time to discuss with suppliers various ways to reduce costs for raw materials and shipping.
Sometimes, it’s possible to work out a bulk order discount that can help lower monthly overhead expenses. It’s also worth exploring alternative supplier options if costs continue to rise.
Consider speaking with various suppliers to compare and contrast price points on the inventory items, shipping materials, employee uniforms, or equipment your business needs to stay competitive.
With a bit of time and effort, chances are you’ll find a supplier who’s more than willing to offer a better deal.
Determine Your Gross Profit Margin
After all expenses and sources of revenue are accounted for, the resulting difference between your profit and loss will provide you with an accurate estimate of your business’s gross profit margin.
For example, if your small business earns an average of $10,000 per month in revenue, but your expenses are $6,000, you’ll have a 40% profit margin. However, remember that gross profit margin does not include operating expenses or taxes, so you’ll want to calculate these numbers to reach your net profit.
Determine Your Financial Goals
Setting achievable, realistic goals for the financial health of your business is essential to achieving growth and long-term success.
To help you set reasonable financial goals, it can help to have access to a suite of small business budgeting tools to keep things organized. Programs like Google Docs, Intuit Mint, or QuickBooks are helpful resources that can make budgeting easier to manage.
Various useful tools for freelancers are available online to assist with the accounting side of being self-employed.
Keep Seasonal Trends and Slow Months in Mind
Most small businesses experience seasonal surges in sales or weeks of low revenue that can throw off budget estimates.
Before finalizing your official budget, consider these seasonal trends to avoid financial problems.
As mentioned earlier, building an emergency fund throughout the year can help you overcome any temporary profit shortfalls that may occur. Conversely, if revenue exceeds projections over a particular month or quarter, it’s a good idea to put aside some extra funds to bolster your financial safety net.
Take Your Business to the Next Level
With the right support, keeping up with all aspects of your small business financials can be easy.
That’s why Noumena provides professional CFO services to help you make sense of all the numbers and confidently plan for the future.
Our team will get you in touch with an experienced financial expert who will walk you through critical financial decisions that can reshape the future of your small business.