How to Set a Budget for Your Business

How to Set a Budget for Your Business

There’s no way around it – you need a budget for operating your business. A budget can tell you how well your business is doing and without one, you run the risk of spending more than your business makes or not spending enough to grow your business to be competitive.

Larger businesses have the luxury of drafting an annual budget, but small businesses, especially new businesses, should set monthly budgets so they can review and adjust as their business grows.

Create a Spreadsheet

The first step in creating a budget is creating a spreadsheet so you have a place to record your expenses and income.

Fixed Expenses

 

Budgeted

Actual

Difference

Rent/Mortgage
Total Fixed Expenses      

Variable Expenses

 

Budgeted

Actual

Difference

Utilities      
     
Total Variable Expenses      
Total Expenses      

Revenue

 

Budgeted

Actual

Difference

       
Total Income      

Determine Your Expenses

After you have your spreadsheet set up, you can determine what expenses you can expect to have. Once you determine how much you expect to spend on fixed and variable expenses, you can put those numbers under the “Budgeted” column. At the end of the month, enter the actual amounts under the “Actual” column.

Fixed Expenses

Your fixed expenses are expenses that won’t change, no matter how much business you have. Fixed expenses can include rent or mortgage payments, loan payments, equipment and pre-paid expenses. Fixed expenses are easy to budget for because you already have the amounts.

Variable Expenses

Your variable expenses are expenses that will change depending on business. Variable expenses can include utilities, supplies, shipping costs, and wages. Determining how much to budget for variable expenses is more difficult than budgeting for fixed expenses.

If you have been operating as a business for several months, look at your past expenses and find the average you spent in each category. If you have not yet started operating as a business yet, research costs associated with your industry and use averages based on your research.

Forecast Your Revenue

If you have already been operating your business, you can forecast your budget based on trends you have already noticed. If you are just starting out, you will have to make some assumptions based on your location, hours of operation, and by researching other businesses in your industry.

Enter your forecasted revenue under the “Budgeted” column. At the end of the month, enter your actual revenue under the “Actual” column.

Compare Your Budget to Your Actual Expenses and Revenue

At the end of the month, calculate the difference between your actual expenses and revenue and your budgeted expenses and revenue to determine if your budgeted numbers were in line with your actual amounts.

By determining the difference, you can identify a potential problem. For example, if your budgeted variable expenses were lower than your actual variable expenses, you might want to consider finding a new supplier or looking for an area where you can cut costs.

On the other hand, determining the difference can also help you capitalize on unseen opportunities. If your actual revenue was much higher than your budgeted revenue, look into why that may have happened. Maybe there’s a demographic, outside of your target demographic, who is interested in your product or service. If that’s the case, consider how you can further attract the new demographic to further increase revenue.

Having a budget allows you to plan ahead, prioritize the allocation of funds, and let you know when you are able to grow your business.