Small businesses need budgets — they put you in control of your money and give you a clearer picture into the state of your business.📝 Gain clarity into your cash flow with these simple budgeting process steps in this article.💡
But first, let’s talk about what a budget is and how it can help your business be profitable. 👇
What is a business budget?
A business budget is a detailed plan that outlines your company’s future spending based on business goals. Budgets track your cash and help business owners estimate exactly how much money is moving in and out of their business.
There are many different types of business budgets available, each with their own pros and cons, but at the end of the day, each budget has similar components. 💰
Common components of a budget
Income (or revenue)
Revenue is the total amount of income generated by your business from the sales of goods or services before any expenses. If you add up the total sales generated by your company, that is your company’s total revenue for the year.
Fixed costs are recurring expenses that don’t change from month to month, regardless of sales or production volume. Some common examples include rent or mortgage payments.
Fixed costs are easiest to budget for because they’re predictable and regular.
Variable costs are recurring expenses that change depending on sales volume of goods and services. Common examples of variable costs include direct materials and labor, shipping costs, and sales commissions.
Variable costs are difficult to budget because they can fluctuate on a weekly or daily basis. As a small business owner, it’s important to budget for variable costs with an annual buffer of 5% to 10% to cover for any increases in the cost of materials, labor or inflation.
Why do you need a business budget anyways?
Budgets are an essential planning tool for any organization to ensure that money is being spent and invested correctly. A well-planned budget will help you:
Forecast earnings and expenses. A budget sets targets for revenues and costs, which helps your team work to achieve them.
Anticipate business fluctuations and keep your business profitable. Your budget can help you identify where to decrease your spending or if you need to increase your revenue, which will help increase your profitability in the process.
Grow your business and obtain a loan. When you can prove you have a handle on your cash flow, you also increase your chances of winning over investors or obtaining a bank loan.
Achieve your financial goals. Your business budget is a financial road map — it evaluates the status of your finances and outlines what you need to do to hit your goals.
Now that you understand the why, you’re ready to dive right in and apply that knowledge!
How to create a business budget: 9 key budgeting process steps
If you’re in the process of budget planning, just follow these 9 simple steps to create your business budget. 😌
Step 1: Review previous financial period
The first step in creating a well-planned budget is understanding your business finances. 📊
If you already have an existing budget, then a good starting point is to look at your previous budget and ask yourself these questions:
Did you spend more or less than anticipated?
Were your assumptions about the industry and your own business growth accurate?
Were there unexpected challenges you faced? What caused these?
Was the budget easy to enforce? Did your team members follow it?
Depending on the answers to these questions, you’ll likely get an idea of how accurate your previous budget was, and from there, make adjustments for this next fiscal year.
If you don’t already have a business budget — don’t worry — you’ll have a few more things to consider, but you can still easily create a forward-looking budget. You’ll want to check your spending from the previous year in order to get an idea of what your business expenses are and ensure that you work that into your budget.
Step 2: Calculate your revenue
In order to know how much money you have to budget, you need to first understand how much revenue your business makes — after all, you can’t spend the money you don’t have.
Create a list of all your products or services and forecast how much you anticipate you’ll make in the next year. ✍️ If your business has additional income streams, such as affiliate commission, make sure to include them into your total revenue number as well.
Step 3: Create a list of your fixed costs
Once you’ve calculated your revenue, the next step is to determine your expenses.
A good place to start is with fixed expenses, as they are necessary expenses that every business incurs and stay the same month over month. More importantly, fixed expenses are not impacted by sales, so whether you have a knock-out sales month or see an unexpected dip, these expenses will remain constant.
Fixed expenses differ for each business and industry, but often include:
🏠 Rent (if you have an office, studio or warehouse space)
💧 Utilities such as electricity, hydro and internet
💰 Salaries for employees
🏦 Business loan payments
💻 Software that is essential for business operations
Assuming your company doesn’t move offices or plans to add additional staff, your fixed expenses should remain similar each month.
Step 4: Create a list of your variable costs
Variable expenses — as their name suggests — are not the same each month, they vary depending on business performance. Typically, the higher the sales volume, the higher the variable costs as you’ll need to produce more products or dedicate more resources to running a service.
Variable costs include:
Operating costs such as costs of goods sold, which depend on sales volume. For example, if your business sells widgets, and you sell more widgets one month, the cost of producing those widgets will go up.
Marketing expenses such as advertising spend or public relations
Corporate investments or donations
Office snacks and coffee
Variable costs are often also called discretionary expenses, but some may be necessary in order to run a business. What one business considers as discretionary, may not be the case for another business. It all depends on what kind of business you run, the industry you’re in and how customers find you. However, for most small businesses, you can consider things like team perks, corporate donations and office snacks as non-essential if the budget is tight.
Step 5: Forecast extra spending
Once you have an idea of both your fixed and variable costs, it’s important to plan for unexpected expenses that may occur. For example, are you planning an office renovation? Are you going to hire new employees that will need additional computers and desks? Do you anticipate any big company events you’ll need to consider? 🤔
It’s important to consider all these scenarios as you plan your budget. Set aside money for anticipated one-off expenses that may occur in the next year, and additional money for a “rainy day fund” to create a safety net for your business.
Step 6: Analyze cash flow
Once you understand your revenue and expenses, this is where your budgeting actually begins!
Cash flow refers to the relationship between money coming in and going out of your company. Understanding cash flow will allow you to easily predict if you'll go over budget or if revenue dips. Identify particular areas or departments of your business that may impact the budget most heavily, and be prepared to adjust accordingly if needed.
Step 7: Determine your budget
Once you have all the numbers available to you, use business budgeting software 💻 to help put your budget together! It can be as simple as using an excel spreadsheet or you can explore a more sophisticated tool that will automate your budgeting process.
Step 8: Apply budget and stick to it
A critical step in budgeting is to share the budget with your teams for transparency and so they can help ensure that you stay on budget. It's likely that you'll depend on your team to handle their own costs, and they need to have the tools and expectations to do this well.
Ensure that everyone involved knows how much they’re allowed to spend and is able to track and report that amount.
Step 9: Review and adjust for the future
Budgets are fluid and can change depending on new business goals or financial circumstances. Make sure to review your budget quarterly (or monthly) and adjust accordingly.
If your forecasted sales targets are off one month, you’ll need to adjust your budget and find other areas to save. In contrast, if you have a great sales month, you have more cash flowing into your business that can be invested elsewhere.
How to stick to your budget with Relay
Arguably, the hardest part of planning a budget is sticking to it. Let’s be real, budgeting doesn’t just happen overnight and learning how to stick to a budget takes practice. Relay is an online banking and money management platform that helps you stay on budget once you've figured out what it is.
Relay offers up to 20 free, no-fee checking accounts that allow you to compartmentalize your budget and categorize your expenses by team or by category. Get visibility into your cash flow with detailed transaction data and advanced features to help automate your payments. If you’re looking for an online banking solution with built-in budgeting features, make sure to check out Relay — you can sign up here in just 10 minutes! 🚀