Running a business can often be a risky endeavor, wouldn’t you agree? Imagine if you could predict the future and determine ahead of time how your business will perform. Sounds too good to be true, right? Well, technically, it is. We all know predicting the future is virtually impossible.
You could predict the future, in a way, with an effective business budget. With a detailed business budget, you can get about as close as you can to anticipating the performance of your business ahead of time. Just think about it, if you had a tool for your business that tracks the past finances of your business and compares those with the current trends, then you could eliminate a lot of guesswork when it comes to planning for the future. With a business budget, you can make educated guesses for the future of your business.
We understand that building a business budget sounds like a tedious task – far from exciting in comparison to say decorating your office. However, a business budget is imperative to the success of your business. Without a proper business budget, your investments could be way off base. And you definitely don’t want that. Whether your business is brand new or has been in business for several years, there are ways to properly plan for the future with a business budget.
Here’s how you can make your budget in just a few simple steps.
Step 1: Revenue
If your business is brand new you may not have a ton of past revenue to look back on, and that’s okay. You can still research within your industry to find what the typical costs have been over the past few years.
For businesses that have been running for a while, you’ll want to look at all your current and past income sources. Make sure you are evaluating each month separately and not conclusively. You also want to look back at several months – a full year is ideal. Once you have the total income for each month calculated, you can then see how your income changes month-to-month. Most likely your business will have some months that are not as successful as others. By knowing this information, you can plan accordingly for the slower seasons in your business.
Step 2: Fixed Costs
The second step is determining the fixed costs within your business. The fixed costs within your business are those that happen every month and never change. These costs are integral to the operation of your business and necessary for operation. It’s important to make a note on each fixed cost identifying whether it is a daily, weekly, monthly, or yearly expense. Expenses like these include rent for your office space, supplies, payroll, etc.
Step 3: Non-Fixed Costs
Step 3 involves identifying which costs are not fixed. These costs fluctuate throughout the year and don’t necessarily happen every month. These expenses are also necessary for the operation of your business. They could include expenses such as utilities, maintenance, marketing, etc. When your business experiences slower months, it’s very helpful to know exactly what these variable expenses are so that you can quickly decide where expenses can be cut.
Among variable expenses are also discretionary expenses. These expenses include anything that may boost the profitability of your business but aren’t necessary for the function of your business.
Step 4: Unexpected Costs
Just as you have an emergency fund with your personal finances, you should also have a similar fund for your business. Unexpected costs happen in our personal lives and at work, and it’s important to be prepared for both. By setting aside money for unexpected costs, you can take care of emergencies without jeopardizing the budget.
Step 5: Profit & Loss Statement
Normally, a P&L statement is a burdening task. However, by completing the previous steps, your P&L statement is simply adding and subtracting. Simply add up all of your income for the month and then subtract all of your expenses from that number. Your resulting number is either your profit or your loss for that month.
Step 6: Outline Your Budget
While your P&L statement is all about the past, your business budget is all about the future. Referencing your P&L will help you to better understand what investments to continue making in the future. If you want more tips for analyzing your P&L statement, click here.
We know these tips will be very helpful for creating your business budget! Whether you’re just beginning your entrepreneurial journey, or you’ve owned the same company for years, Ark Financial knows how to create the ideal financial plan for you. Contact us today!