Accounting Management tips

How to
create a
budget for
a small
business?

One of your most important tasks as owner of a new SMB is to implement a budget. The budget allows you to plan income, expenses, profit and even closely follow your objectives. For these reasons, it is an essential part of your business management.

Budget planning may seem tedious, but it is still indispensable and can help you to make better decisions concerning your finances so that your business can be successful and eventually grow.

We explain how to create your budget in 5 steps!

What is a business budget?

A budget is a detailed plan that outlines how you plan to spend your money on a monthly and/or annual basis. Good budget management allows you to determine the income required to cover your monthly costs, know how much money you can reinvest in your business and know when you have the means to hire help.

Roughly speaking, a budget helps you to:

• Project your income
• Plan how to spend this income
• See the difference between your expectations and reality (a budget is the only way to know if you are actually spending your money the way you imagined).

Every dollar counts! By not planning a budget, you are missing a great opportunity to improve the management of your finances, i.e. cut unnecessary costs and invest your money where it will have the most impact.

How to create a budget

The first budget is often the most difficult to make since you still don’t have financial data to rely on. This is the only time that you will have to guess and assume, as best you can, certain amounts in order to have a starting point to base your budget on. For subsequent years, you will have your previous year’s numbers to create your new budget.

The steps to creating your budget are:

01 Identify your income sources

Start by identifying your various sources of income and the total amount of income for a month or a year (sales are normally the primary source of a business’s income).

It’s probably a good idea to project less income and more expenses in order to avoid bad surprises. Everything costs more and takes more time than you think (you probably noticed that when you launched your business).

02 Determine your fixed costs

Fixed costs are expenses whose price does not change from one month to the next. Your rent, salaries and insurance are examples of fixed costs to consider in your budget. These expenses are independent of the number of clients that you have each month.

03 Calculate your variable expenses

Variable expenses are monthly expenses that do not have a fixed price and which can vary according to number of clients you have in a month. Examples of variable expenses are sales commissions, publicity, packaging, shipping fees, etc.

04 Predict your one-time expenses

One-time expenses are expenses that arise once during your career, usually close to the launching of your business. Some of these expenses can be predicted, such as purchasing furniture for your workspace, your management software, etc. However, sometimes these expenses are a surprise, such as replacing a computer that breaks down.

05 Add it up!

Once you have taken the time to find all the amounts for the above categories, the final step is to add them up and determine your profit, based on your income, expenses and projected costs.

It is important that you follow your progress each month (and at the end of each year) and compare your budget to your general ledger data in your accounting application. Without solid bookkeeping that allows you to make comparisons and follow-ups, your budget will not be very useful. It is by comparing your budget to the actual figures that it becomes useful.

The best budgets are simple and flexible. Yes, you create a budget in order to respect your objectives as much as possible, but in the event of a change of direction or instability, you have to be able to turn around and adjust to the unexpected. That is why it is recommended that you always keep some leeway in your budget.

Takeaways

You don’t have to be an accountant to make a budget. Obtain an accounting management software as soon as you start, take the time to find the appropriate numbers, perform regular follow-ups, and creating your budget will become child’s play (well maybe not child’s play, but close to it).