Having a good budget is one of the most critical elements of creating and running a successful business. However, it can sometimes be intimidating to try and make one, or seem like an unnecessary use of your time when confronted with the vast number of things that demand your attention as a business owner, and how quickly things can change for your business due to factors beyond your control. If you can create a solid budget, it will serve as a guide for your financial decisions throughout the year and help you make decisions that will sustainably grow your business.
Budgeting Considerations for Your Business
Start with what you know.
The best place to start when creating a budget is always your plan for the previous year. Basing your budget on what has already occurred will help you develop reasonable expectations for your income and expenses and is more likely to result in a plan that can be followed. Use your initial fixed costs, revenue, and variable costs as a starting point, remembering to remove any one-time expenditures like replacing equipment.
If you are starting a new business and don’t have anything to work from, then you should start doing research. Call companies to determine the cost of equipment and supplies you’ll need to run your business, talk to people in your industry about what to expect, and study the local business environment to make educated estimates about how much you will make and spend.
Overestimate expenses, underestimate revenue.
It’s good to be cautious when planning anything, especially where it concerns finances. When estimating revenue for your business, use previous figures but always plan to make it closer to the lower amount of your range. This will ensure that if you do make less than you did previously, you will be adequately prepared, and if you make more, it will be a happy surprise that allows you to save more or reinvest in your business.
You should also tend to overestimate how much you will spend each year. Business owners often encounter many unexpected events and setbacks, and you should be prepared if it becomes necessary for you to hire new employees or replace equipment. Overestimating expenditures gives you a cushion if everything goes well and prepares you for unforeseen problems.
Set aside part of your revenue
Part of anticipating setbacks is having a fund for emergencies. Don’t create a budget that has you immediately spending all of your money on your business; make sure to ‘have a set amount that you will put away each month for emergencies. Just like in personal finance, it always pays to have savings should disaster arise.
Creating an initial budget should be focused on estimating conservatively and preparing for problems that will naturally arise in the course of your work, but always remember that budgets need to be adjusted depending on the realities of your business situation. Staying flexible and being prepared are the most essential parts of creating and keeping up your budget.