How to Put Together a Business Budget
It’s difficult to reach a destination you’ve never visited before without a map or a set of directions. You can apply the same type of thinking to helping your business reach its financial goals. If you don’t have a clear set of directions or a plan, it’s nearly impossible to achieve your financial goals. You can think of a budget as a roadmap that guides your company along the path to financial success. With it, you’re able to see what your company is spending each month, what its revenue is, and what changes you need to make to keep your business in the black or at least to keep it from losing money. If you plan on applying for a loan or working with investors, a budget allows a lender or investor to see how your company handles its finances.
While the process of putting together a budget will be slightly different for each company, depending on its revenue and earnings and its expenses, there is a general process that works for many businesses.
1. Calculate Costs
Every business has expenses and costs, from rent to insurance and from payroll to taxes. If you have documentation from previous years, showing what your company paid in salaries, taxes, rent and for other expenses, you can use that information to give you a ballpark figure for your costs and expenses for this year.
Typically, when calculating your business’ costs, you’ll divide expenses into two major categories. Fixed costs don’t change from month to month. They include things such as insurance premiums, your rent, and any loan payments. Variable expenses can fluctuate from month to month. They include payroll, taxes, and utilities. It’s easier to budget for fixed expenses, since you always know what they will be. Variable costs can be trickier, but if you have past bills or know the average of what you paid in the past, you can use that number to give you a reasonable estimate.
2. Calculate Revenue
Step two of making a budget is determining how much your business earns or projecting a target for earnings. You can use past financial statements to get a fair idea of what a reasonable sales or revenue goal is for the period you’re budgeting (whether it’s a month or a full year). Keep in mind that you’re making a best possible guess when it comes to revenue, and that at the end of the month or year, your actual numbers might be different from your projections.
3. Keep Track and Adjust as Needed
Business budgets are constantly evolving things. That’s why it’s important to keep tabs on your company’s actual spending and earnings and to make changes to your budget as needed. For example, an economic downturn can mean that your sales drop off. To better balance your company’s income and expenses, you may need to find places to trim your costs for one month or several, until your revenue comes back up again.
Having a budget allows you to see if you’re meeting your company’s goals. You might realize that your revenues aren’t anywhere near being able to cover your expenses, for example. In that case, you can find ways to increase income, such as seeking out new clients or finding a new investor to work with you.
With a budget, you can also see if certain projects are paying off or not. For example, you might have increased your spending on sales for several months, expecting to see a significant boost in your customers or products sold. But, it turns out that the additional spending hasn’t done much for increasing actual sales. You can reduce spending on sales and brainstorm new ways to increase sales.
Working with a virtual chief financial officer allows your company create a budget that works, without the cost of hiring a full-time CFO. Whether you’re putting together your first budget or need to make adjustments to your current one, New Direction Capital is here to help. Contact us today to get started.
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