You might wonder whether you even need a budget for a small business. After all, your business was steady and you had a good understanding of your cash flow, expenses, and profits. But then, I doubt there is a business that was not impacted by the pandemic last year. And unexpected things like that may happen any year. So where do you start?
Basic budgeting concepts and definitions.
Revenue: the dollar amount you expect to make from selling goods or services over a certain period of time (year/quarter/month). If you have a breakdown by year/quarter/month – you have a better chance to keep track, adjust, and recover your business if revenue level is not achieved. And since you plan for the future, your Revenue is an estimated $ amount, but your goal is to perform better than your revenue.
Cash Flow: all the money that travels into and out of your business. It is highly recommended to keep track of your cash flow on a weekly basis. You want to have enough money to pay for all your fixed, variable, and one-off costs by the end of each month. And knowing how much money you have on hand during the month becomes crucial.
Fixed costs: consistent costs that don’t change no matter how much money you made. It could include rent, insurance, accounting or legal fees, etc. You can always plan to lower your fixed costs year to year depending on an opportunity.
Variable costs: consistent costs that could change month to month according to the production volume, transportation costs, etc. For example, the cost of flour may change which would affect the baking business. Sometimes salary falls under variable cost, especially for seasonal businesses.
One-off costs: planned and unplanned costs that fall outside the usual workflow of your business. The one-off moving expense for an office, software update, launch of the new product, etc.
Profit: everything left after deducting all your expenses. Two major ways to make a profit: cut your expenses or increase margin by increasing total sales. And knowing each line of your budget helps you understand and make this decision.
Budget Planning: a helpful tool to keep track and summarize your expenses and income, compare it and adjust your business according to your needs. For a small business, a simple budget table would work, there are multiple free resources that can help you create and plan your budget.
Microsoft Excel Templates
Capterra Free Small Business Budget Templates
Apple’s Numbers Budget Templates
Make a mindful decision on the template that suits your business the most. It all will make sense when you start collecting accurate financials through your bookkeeping process. Budgeting is a process of planning and bookkeeping – of execution of your plans. Ideally, you want these two to align. Have questions about where to start and how to merge the two? We will discuss Bookkeeping for small businesses in the next Blog.