Starting a small business is exciting, but handling the finances can be tricky. Think of small business budgeting as your friendly guide in this money maze.
Whether you’re sketching out initial plans or navigating the early stages of your business venture, we’ll unravel the essentials of building a solid budget. Once complete, you’ll have a reference point to make informed decisions and steer your organization toward lasting prosperity.
The Importance of a Separate Business Budget
It’s essential to keep your business finances separate from your personal assets. Although it may seem tempting to dip into your own funds to help give your business a boost, especially in the early stages, doing so can impact your business’s long-term success and stability.
Keeping your personal and business finances separate, you establish and maintain your company as an independent entity – as it should be. Plus, having a dedicated business account and budget helps you protect your personal finances – making it much easier to track business expenses for tax purposes.
Using Your Small Business Budget
The longer you’re in business, the easier budgeting can become. You’ll have previous years’ financials to help you make more accurate predictions and decisions. In the beginning phases, your budget still holds tremendous value. However, instead of an exact plan, use it more as a comparison tool to actual events within your business. Use it to identify key moments and opportunities, such as:
- Sales Projections: Do your revenues fluctuate significantly at certain times of the year? For example, if your business is tourism-based, does most of your income come during the summer? Or are your sales steadier, providing a constant flow of revenue? Use these figures to help plan for upcoming months and prevent the need to take on potential debt.
- Expense Projections: As your business grows, new expenses will arise. Keep track of all operational costs and make note of any outliers. For example, material costs might increase at certain times of the year.
- Profit Levels: Is your business profitable monthly? If so, are there areas within your business where you can reinvest gains to grow the organization effectively or make operations more efficient?
How to Start Small Business Budgeting
Crafting a business budget becomes easier the longer you operate. If you’re starting, use your most recent transactions and industry knowledge to begin the process.
Step 1: Predict Your Revenues
Examine any past sales data and predict your upcoming revenues. Many business owners tend to overestimate sales at the beginning, so keep your figures realistic. Identify any sales opportunities, such as:
- Product Sales
- Client or Consulting Fees
- Service or Subscription Contracts
- Affiliate Sales
Step 2: Subtract Your Expenses
Again, use your past financial statements to identify upcoming expenses. Then, break your costs into two categories: fixed and variable. Subtract these expenses from your predicted revenues.
Fixed costs remain constant throughout the month or year. Examples include:
- Facility costs, such as rent or lease payments
- Personnel costs for salaried employees
- Property taxes
- Insurance expenses
- Business loan payments
Variable costs can fluctuate throughout the month or year. Examples include:
- Product inventories
- Raw materials
- Personnel costs for hourly or contract employees
- Equipment rentals
Step 3: Create an Emergency Fund
Just as you would create an emergency fund for your personal finances, you want to do the same for your business. A growing business’s expenses constantly change, and new costs, like additional employees or more inventory, will arise. You want to be prepared and avoid taking on business debt with an emergency or contingency fund for your company.
Determine a realistic figure and place these funds monthly into a separate business savings account to prevent spending them accidentally or frivolously.
Step 4: Analyze Profits
After predicting your revenues and subtracting your expenses and emergency funds, determine if your business is profitable. Do you need to adjust figures in your budget to remain positive? Are there periods when sales or expenses cause your business to dip into the red? If so, Step 5 will help.
Step 5: Annualize Your Budget
You might begin with a monthly budget, but annualizing your figures will help you better understand your business. Take your monthly figures and spread them out over 12 months. From here, plug in variables, such as higher revenues in the summer or added employee costs over the winter holidays. If your profits are higher in certain months, then save more in your emergency fund to cover months where expenses might increase.
We’re Here to Help!
Starting a small business or growing your existing organization is exciting and challenging. Crafting a budget and updating it regularly will help guide you through the financial maze that awaits. Many tools can help you along your journey, such as a business credit card or line of credit. Both will help with cash flow and ensure your operations run smoothly.
If you want to learn more about business accounts or have questions about your small business budgeting, then we’re prepared to help. Please stop by any of our convenient branch locations or call 1-800-531-8456 to speak with a team member today.
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Each individual’s financial situation is unique. We encourage you to contact United Texas Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
