Preparing a small business budget can be overwhelming despite the numerous online resources and guides. Each business is different, so it is essential to understand your unique goals and define them for 2021 – a year that is bound to be eventful. Nonetheless, various fundamentals can help you set a realistic budget for the entire year. Here’s a quick take on how to create a budget for a startup or small business.
Define Business Goals for The Year
Setting the budget lines requires understanding business goals for the entire year. The goals will reveal what the business must acquire and facilitate to meet them. To set budget lines, examine the required changes, what’s predictable and uncertainties. Previous years’ budgets are also worth reviewing before setting budget lines. Calculations for how to prepare a budget for business vary from company to company but mainly involve five to six steps as follows:
1. Income Sources (Revenue)
The first step to budget preparation involves tallying your revenue or income sources. This is all about identifying how the business makes its money and summing all the income sources to determine how much is generated monthly. Through modern tools and accounting software, you can easily track all income sources and find data for at least 12 months. While calculating monthly revenue, look for seasonal variations and examine them. It’s important to separate the different revenue streams and to understand the relationships between different revenue sources (e.g. software licenses and premium support revenue, number of customers and number of users).
2. Fixed Cost
Once you know how much money is generated monthly, you should determine monthly costs, starting with fixed costs. These include rent, supplies, payroll, debt repayment, taxes, insurance and other costs that don’t change from month to month. Make sure you explore all fixed costs, as most are unique to the business. For instance, a software business will have different fixed costs from an hardware company.
3. Variable Costs
Unlike fixed costs, variable costs change from month to month and depend on the volume of business you’re doing. This is where the concept of ‘drivers’ is most important. What drives the total spend on employee benefits? What drives the cost of product development? How are shipping costs related to the number of units sold. How are accounting and administrative costs driven by the number of clients, number of vendors and number of employees? Tracking cost fluctuations will help you determine business performance and how each variable influences your profitability.
4. Contingency and One-Time Funds
One time big purchases are common among small businesses. You should set aside funds for such expenditure in the budget. Contingency funds can also be used in emergencies, for instance, when an equipment breakdown occurs suddenly. Make sure you have covered both planned and unplanned expenses, which calls for accurate data and stats.
5. Profit Loss Statement vs Cash
Understand the difference between how profitable your business is, and what your cash needs are. Your business may be highly profitable, but customers may pay late, and you may need to make equipment purchases or key hires for growth which deplete your cash. Understanding timing of cash will help you avoid pitfalls.
Professional Business Budgeting and Accounting
Are you looking to create a realistic budget for your startup or small business? Coffiniy works top-down and bottom-up using high-quality data and digital tools to provide accurate business accounting and bookkeeping. Our goal is to help you make informed decisions by providing robust accounting reports detailing all the crucial aspects. Business budgeting and accounting are best handled by professional Startup CFOs and Startup Accountants and that’s who we are. Contact Coffinity today for more on how to create a budget for business or sign up to our newsletter to keep tabs on financial trends, technologies and news.