A penny saved is a penny earned, right? Edmond Knowles, the guy who holds the record of the largest ever single cash-in of pennies turned in 1,308,459 for a total of $13,084.59. He plans to use the money for his retirement, emergency medical expenses, and home repairs – so he understands just how important every single cent is.
If you’re not taking the time to plan and track where your money in but every month, you are missing valuable opportunities to cut costs and move money to where it will have the biggest impact on your business.
Creating a budget is the only way to determine if you are spending money the way you think you are. You may be surprised at what you find.
Business Budget Planning: How To Plan and Create a Budget That Works
A budget is a detailed plan that outlines where you’ll spend your money on a monthly or annual basis.
You assign every dollar to a job based on what you think is the best way to use your business funds. Then, you’ll go back and compare your actual spending to the plan to see how well you did.
A business budget will help you:
- Forecast the money you expect to earn
- Plan where to spend the revenue
- See differences between your plan and reality
The Components of a Good Budget
The best budget is one that is both simple and flexible. You can expect that circumstances will change so your budget needs to give you the flexibility to provide a clear picture of where you are at all times.
Your budget needs to include the following components:
Your estimated revenue is the amount you expect to make from the sale of your goods or services. It’s the cash that comes in the door regardless of what you spent to get there. This is the first line of your budget. You can base it on last year’s number, or if you’re a start-up, base it on industry averages.
These are the regular and consistent costs that don’t change according to how much revenue you earn. Things like rent, utilities, insurance, bank fees, equipment leasing, and so on.
Do you think that cost that change according to your production or sales volume and are closely related to your cost of goods sold. This may include costs for inventory, raw materials, production, packaging, or shipping. Other variable expenses include credit card fees, travel, and sales commission.
The cost of salaries may fall under both fixed and variable costs. Your core and house team is generally associated with fixed costs, whereas your manufacturing or production team or anything related to the production of your goods is treated as variable costs. Make sure you file your various salary costs into the correct area of your budget.
You want out costs are those that fall outside the usual work your business does. These include start-up costs like moving into a new office, furniture, software, equipment, and any other costs related to research and launch.
Cash flow describes all of the money that travels into and out of a business. You have a positive cash flow is there is more money coming into your business then there is going out over a. Of time. This is easily calculated by subtracting the amount of money available at the beginning of a set. Time and at the end.
Cash flow is the lifeblood of every business so you need to monitor this weekly, or at the very least monthly. You could be raking in money, yet not have enough money on hand to pay your suppliers.
Profit is what’s left after you pay all of your expenses from your Revenue. If your profits are growing, your business is growing. This is the area where you will plan out how much profit you plan to make based on your projected revenue, expenses, and the cost of goods sold. If the difference between revenue and expenses, also known as profit margins, isn’t where you want them to be, you need to reconsider your cost of goods sold and consider raising prices.
If you think you cannot squeeze any more profit margin out of your business, it may be time to increase your advertising and promotions so that you can increase your total sales
A budget calculator is a helpful tool to help you see exactly where you are when it comes to your business budget planning. Getting all of the numbers in your budget in a single easy to read summary is crucial.
Create a Microsoft Excel spreadsheet with a summary page with a row for each budget category. This is the basic budget framework. Then, next to each category, list the amount is budgeted. Create another column to the right when the time. Ends and use it to list the actual amount spent in each category. This will create a snapshot of your budget that’s easy to find without diving into multiple crowded spreadsheets.
To make it even easier, link the totals on the summary page to the original sons and your other budget tabs. This way when you update any figures, your budget someone gets updated at the same time so you have your very own budget calculator.
Small Business Budgets Are Not One-Size-Fits-All
Every good budget operates from the same framework but you’ll need to think about the unique aspects of your industry and business type to create the right budget for you.
Budgeting for a new business is especially tricky because you generally don’t have a model to work from. That’s why it’s important to do your due diligence and research industry benchmarks for rent, marketing costs, salaries, and more. Ask your network about what you can expect to pay for benefits, equipment, professional fees and more. Make sure to set aside a portion of your budget for accountants, lawyers, and advisers. Spending a few thousand dollars upfront could save you thousands more in legal fees and avoid inefficiency later on
Custom Order Businesses
If you operate a custom ordered goods business, you’ll need to factor in labor time as well as the cost of operations and materials. This will vary from order to order, so create an average estimate to work from.
If you must stock up on inventory to meet demand, doctor this into your cost of goods sold. Use the previous year’s sales or industry benchmarks to take an educated guess that’s the amount of inventory you need to cover. Taking time to research upfront helps ensure you’re getting the best possible prices from your vendors and shipping the right amount to satisfy I need, mitigate shipping costs, and sit within your budget.
Your inventory volume may have an effect on your pricing. If you order more inventory, your cost per unit is lower, but your overall spending is higher. You need to factor this into your budget and pricing to ensure the volume ordered isn’t greater than product demand.
It’s also important to include the cost of storage solutions or disposal of any leftover stock.
If your business has a busy season and a slow season, budgeting becomes even more crucial.
Because business isn’t consistent every month, a budget gives you a good view of both past and present data to predict future cash flow. Forecasting this way helps you spot annual trends and to see how much money you need to get through the slow months, and look for opportunities to cut costs to offset the slow season. Use your slow season to plan for the following year, negotiate with vendors, and engage with customers to build loyalty.
Never assume that the same thing will happen year after year. Just like any budget, forecasting is a process that involves. Start with what you know and provide your best guess when you don’t know something. this way you have money set aside for an emergency that doesn’t happen rather than being blindsided by the unexpected expense.
when it comes to e-commerce businesses, the main budgeting factor is shipping. Shipping costs and import duties can have a huge impact.
Do you have the room in your budget to cover shipping to customers? if not, is there an alternative strategy that’s in line with your budget, such as offering flat rate shipping or real-time shipping quotes for customers? packaging can also affect shipping rates so you’ll need to factor that into your cost of goods sold, too. Consider any International warehouse shipping cost and duties.
Strive to create the best possible online shopping experience for your customers. This means you’ll need to factor in a good web hosting service, web design, advertising, social media, blogging, and product photography into your budget.
If your business does not sell physical products, focus on projected sales and revenue along with salaries and consult in the car. Figures in these industries are an estimate which means budgets must have flexibility. These figures rely on the number of individuals needed to provide the service along with the cost of their time and fluctuating customer demand.
Business budgeting takes time and effort. Business owners need to sit down with their business plan and create a list of all their business needs. As a brand new business, it can be difficult to forecast business expenses and revenue, but once you have financial statements to work with, you can make adjustments when and where necessary.
Small business owners can use accounting software to keep track of money, to help them make financial decisions that will strengthen the bottom line. Combining accounting software with procurement software makes it even easier to track what’s been ordered, set spending limits on each department every month or every year, set up approval workflows for large purchases, and more easily track where every dime comes and goes.