A successful business journey requires careful planning and strategic decision-making. One crucial aspect that holds immense significance in this journey is small business accounting. This includes a wide range of activities, from managing cash flows and tracking expenses to creating financial reports and maintaining tax records. However, one of the most critical elements under the umbrella of small business accounting is business budgeting.
This article will take you through the process of creating an effective business budget, illustrating how it can significantly influence your business’s financial health and growth.
What is a Business Budget?
A business budget is a structured plan that outlines an organization’s revenue, expenses, and net profit over a specific period. It could be monthly, quarterly, or annually. It provides a roadmap for your earning and spending, offering a glance into your organization’s financial future and facilitating better decision-making.
Whether you are planning to launch a startup or are already running a small business, creating a budget should be your first step. It provides clarity on your financial status, helps you devise a plan for your business’s future, and enables you to enjoy monetary benefits.
Benefits of Business Budgeting in Small Business Accounting
A well-planned budget brings several benefits to your business. It gives business owners the confidence to run their organizations and allows them to identify cash flow and spending issues. It also enables owners to have control and insight when dealing with financial challenges.
Moreover, business budgets help predict cash flow, identify trends, and demonstrate positive money management to lenders and investors. This, in turn, aids in spotting and rectifying problem areas quickly. In short, a detailed budget is a key to your business’s success and an essential component of small business accounting.
Components of a Business Budget
A business budget should provide a comprehensive view of your organization’s total revenue and expenses, revealing the net profit or loss. It should include the basic everyday revenue and expenses, including:
- Average order amount
- Number of product orders per month
- Billable hours
- Average payroll costs
- Material expenses
- Rent, mortgage, utilities and other expenses
Make sure you are collecting accurate data points while dealing with your business’s finances. Any mathematical error or typo can lead to confusion and uninformed financial decisions.
How to Create a Business Budget
Creating a budget for your business may seem daunting, but it’s a simple process when broken down into steps.
Step 1: Calculate All Forms of Income
The first step in creating a business budget involves aggregating all of your income forms. This includes total revenue from selling services or products. Once you have a clear picture of your net income, it becomes easier to determine how much you can afford to spend and whether your business is growing or stagnating.
Step 2: Subtract Fixed Expenses
Following the calculation of total income, subtract your fixed costs. These are the expenses that remain consistent over the year, such as commercial rent or mortgage, operational utilities, loan payments, insurance bills, and employee salaries.
Step 3: Subtract Variable Expenses
In addition to fixed costs, businesses also have variable expenses that may not be the same every month. These expenses might be tricky to predict, but you can estimate them based on old receipts and invoices.
Step 4: Prepare for Emergency and One-time Expenses
Unplanned events and emergency expenses can add up quickly, so it’s wise to plan ahead and set aside a cash reserve for such occurrences.
Step 5: Create a Profit and Loss Statement
Once you have accounted for your income, fixed, variable, and emergency expenses, you can create a profit and loss (P&L) statement. It provides a high-level overview of whether your organization is profitable or not and serves as the baseline for creating your business budget.
Step 6: Draft Your Business Budget
After reviewing your P&L statement, you can draft your business budget for the next year, quarter, or month. This budget will outline your expenditures and designate limits for each over a given period.
Customizing Your Business Budget
Every small business is unique, with its own niche, workflow, and financial goals. Therefore, there’s no one-size-fits-all approach to business budgeting. As you learn how to build a business budget, consider the following:
- Seasonality: This can affect customer buying behaviors, depending on your business type. Consider these fluctuations in profit and expenses when planning your budget.
- E-commerce: If you run an e-commerce business, be aware of hidden costs like shipping fees, website upgrades, and point-of-sale expenses.
- Startups: Budgeting for a startup can be challenging due to limited data and performance history. However, using accurate accounting software and making conservative estimates can improve your business budget year after year.
Best Practices for Business Budgeting
Business budgeting, being an integral part of small business accounting, should be approached with care. Some best practices include:
- Considering the impact of every change in expenses or income on your budget.
- Ensuring that you budget for all expense categories, including fixed, variable, and emergency expenses.
- Viewing your business budget as a living document that needs regular review and refinement.
- Setting goals but avoiding wishful thinking.
- Looking out for ways to cut costs and create growth.
Business Budgeting with QuickBooks
Creating a business budget can feel overwhelming, but small business accounting tools like QuickBooks can make the process much smoother. QuickBooks features tools like automated cash flow forecasting, a business debit card integrated with your accounting software, making it easy to manage your business finances.
Small business accounting is a comprehensive process that involves multiple tasks, but business budgeting stands out as a crucial aspect. An effective business budget not only keeps your finances in check but also paves the way for future growth.
With your financial statements up-to-date, you are able to project cash flow, create accurate budgets, and plan for the future to account for possible slow periods or unexpected costs.
For assistance with preparing a business budget and maintaining accurate accounting records, contact us. We can assist you in taking control of your business financial future!