To create a successful business, you need to be financially responsible. You need to figure out how to spend the money before making it. When you create a budget for your business, you can track the cash at hand, your expenses, and how much revenue you need to keep the business afloat. This in turn will ultimately determine your business growth.
Once you keep track of your finances you will be able to forecast your future needs, spending, profits, and generally your cash flow. You will be able to build a sustainable business and also be able to perceive before they occur.
What is a Business Budget?
A business budget gives an overview of your business finances – expenditures and revenues. It compares the current state of your finances with the long-term future goals. And this will help you in making informed financial decisions for your business.
Why is a budget important?
There are numerous reasons why you should have a budget, budgets help you estimate:
- How much money do you have,
- The amount you need to spend and,
- How much do you need to bring in to meet your business goals?
A budget provides clear information on the financial status of your business and also what your expectation should be. The information on the budget is necessary just in case you need to get a business loan or equity funding from investors.
Also, sharing your budget with your employees gives them a better overview of the business goal, which will give them the push towards achieving the business goal.
Steps to create a budget
1. Identify your income channel
Have a clear picture of how much money your business is making monthly and where it is coming from. For example, if your business generates income from construction projects, you could make additional income from sales of construction equipment. And also from offering repairs to equipment of other construction businesses.
Ensure you take into account all your cash inflow points and properly document them. So you can get a clear idea of the total of your income on a monthly basis.
2. Know your fixed and variable costs
Your fixed costs are expenses that stay the same from time to time regardless of any factor. These costs can include a lease, rent, payroll, insurance, Interest payments, certain utilities like internet and other subscriptions, etc. Fixed costs are the same every month. For example, if you rent an office space and pay N300,000 per month for it, that’s a fixed cost.
Unlike Fixed Costs, Variable Costs are determined by your monthly business performance and activity. The costs most times change month to month and they can be adjusted based on your monthly activity and performance.
Fixed costs make up 70% of your budget and consist mostly of money spent on rent or insurance (e.g. for office space), but there are other types of fixed expenses too: marketing materials like ad campaigns, etc. payroll directly tied to employees’ salaries & benefits packages, etc. maintenance fees associated with physical assets such as equipment
3. Get a business credit card
If you’re looking into getting a business credit card, there are several things that you should be aware of.
- Business credit cards have higher limits than personal ones, which means they can help you pay for more expenses without having to worry about your cash flow.
- Business credit cards have lower interest rates than personal ones, making them a better option if your budget is tight or if you plan on using the card frequently.
- Business credit cards usually come with additional fraud protection features that are not included on most personal accounts (such as free ID theft monitoring).
4. Choose the right billing method
- Choose the right billing method when you create a budget.
- Payroll is the most common and widely used billing method for small businesses. It’s simple, convenient, and easy to manage—but it also comes with its downsides (like late payments). For example, you may have to deal with payroll taxes and other administrative costs that can add up quickly if you don’t keep track of your employee hours accurately or pay them on time.
- Billing by the hour is another popular option for small businesses that want flexibility in how they bill their clients but don’t want all those headaches associated with payroll processing in general. Fixed pricing allows clients who are comfortable with monthly invoices instead of weekly ones because they know what they’re getting when signing up for services like marketing consulting or graphic design. Fixed pricing comes with a deposit required before work begins; this is meant as an incentive not only because it helps reduce risk but also because clients feel more confident knowing there will be some financial backing from day one rather than having no idea what’s going on until after some initial work has been completed (and then having nothing left over).
5. Track costs and compare them to budget
Tracking costs and comparing them to a budget is one of the most important steps when you create a budget. You should use a spreadsheet or program like QuickBooks to track all your expenses, including utility bills, insurance premiums, and other fixed costs.
You can also track your income on a weekly basis so that you know how much money comes in each week as well as where it goes. If there’s overspending on any particular month or quarter (which happens sometimes), cut back on spending until things balance out again!
Running a small business is tough, but it’s also the best way to make money and have a meaningful impact on your community. By following these five steps, you can track your costs and get a better sense of how much it will cost to run your business. We hope this guide has helped you understand what that number actually means for your bottom line!