As an entrepreneur starting out in business, you might know a lot of things about how to penetrate your market, but you can’t know everything. One of the areas that most start up business people find themselves lacking is in bookkeeping.
Budgeting is an aspect of bookkeeping that most people think comes naturally, but it doesn’t. Even though you are very good at maintaining a healthy personal budget, when it comes to a business, the principles change.
With a little training, though, you can learn tips that will get you started in creating a good business budget.
Why is it important to budget?
Before you start your business, it’s important to come up with an estimate of your expected expenses.
- Without a planned budget, you run the risk of overspending.
- On the other hand, lack of budget estimates when starting off will mean that you will never know when you have enough money for expansion.
Your estimated budget will guide you in the first few months and you can scale up or down once you start building historical records of your revenue and expenses accounts.
Tailor your budget to your business
Every business is structured differently and due to this, every business needs to tailor its budget to suit its size and business needs.
But even with these differences, the principle of budgeting is still the same in every business. It is simply a balance of revenue versus expenses.
There are some expenses that you cannot go without paying such as:
- Cost of production
The cost of purchasing your products or raw materials should be the first thing you plan for.
Additionally, you have to factor in the expenses that will be incurred in getting your products from the supplier to your premises. Such expenses include fuel, transportation, duties and levies.
- Operating costs
Expenses such as mortgage or rent payments, utility bills and taxes should take priority in your plan. You should also include expenses such as attorney fees, payroll, and office supplies, depending on how much you deem them important for your business to run smoothly.
How to project your revenue
If you are in your first month of operation, you cannot know how much your business is going to make. If your business is already running, you can extrapolate performance based on performance so far.
It helps to use other successful businesses in your industry to benchmark your scope of revenue. Factors such as geography, demographics, number of hours you operate and distance to the market can impact the potential of your business to make revenue.
Your startup capital will heavily impact how much revenue your business will generate. If you have invested in production, sales and marketing, your business is likely to generate more revenue.
To remain profitable, you have to ensure that your expenses don’t exceed your revenue. Match the expenses against revenue and trim where necessary. The ideal scenario for any business is to generate as much revenue as possible with the least amount of expenses.
The lower your expenses, the more money you will have for expansion and savings.
To come up with the best budget for your business, you should adhere to the below guidelines:
- Research industry standards
There are budget similarities in every industry. If, for instance, you are running a restaurant, you will have similar expenses. The only difference will be the scale.
Only by doing research will you be sure that you are working with the right budget groups. You don’t want to start a business and then find that you failed to budget for a critical piece of equipment or enough taxes. You can talk to other business owners to know what to expect. You can also do your research online.
Base your estimates on averages and try to stay above that average if you’re measuring revenue, or below the average, if you’re estimating expenses. Small businesses are unpredictable, and in case the industry changes, being on the right side of industry averages will make sure your business emerges unscathed.
- Start with a simple plan on a spreadsheet
A spreadsheet is a key tool for any small business. Before you launch your business, work out all the specific details of your revenue and expenses on a spreadsheet.
Work with very specific numbers when it comes to production, taxes, insurance, rental amounts and pricing of products.
- Put a contingency amount aside
Your budget should have room to accommodate slack. There are certain factors that are not in your control, and due to such factors, your business might not generate the predicted revenue or operate within the estimated expenses.
You should have some money put away to take care of contingencies.
- Cut costs in order to grow
Cost cutting is essential for every business. Even large corporations employ cost cutting measures when they want to expand or when they are making losses. If you have a vital business opportunity that you would like to capitalize on, cutting costs could release the required funds.
A great way to cut costs is to take advantage of discounts and credit terms offered by suppliers. By buying in credit for instance, you can put more money into marketing your product, with the aim being to move your product faster.
- Review your budget at least once a month
A small business requires regular budget reviews. As small businesses are very unstable, a lot can change within a week or a month and you need to keep adjusting your budgetary requirements to keep up with the changes.
If you don’t review your budget regularly, you could be headed for great losses ahead.
- Aim to pay less for goods and services
Take advantage of any opportunities that will save you money on expenses. If you have been printing your marketing material through one supplier, but another supplier comes along and can deliver the same quality for less money, you should go with the new supplier.
When reviewing your budgets annually, try to renegotiate any contract terms that you have with your suppliers so that they give you better terms.
There are many free budgeting tools online that can be used for a startup business. Your spreadsheet also comes with budgeting templates for business. These tools should get you started. However, as your business becomes more complex, you should hire a qualified accountant to assist with your finances.
Julian Castigliego has been running a successful small business for the last four years. Before starting his business, he consulted national debt relief for budgeting advice. Visit his site to learn more.