Creating a budget can help a company operate its business better. A budget helps an entrepreneur determine whether they are spending money in the right places and maintaining good control of their business. The budget can help ensure a company’s long-term success. Business owners can estimate the revenue necessary to become profitable and predict slow months to keep the company out of debt. This process minimizes the risks of the business and increases the efficiency of reaching the business’ goals. Moreover, the budget is essential for a company’s capital, as bankers and other financiers may want to see a budget when companies ask for a loan or investment. In this article, we’d like to share a 4-step plan for creating a business budget.
Step 1: Calculate the Revenue
The first step of creating a business budget is figuring out how much money the company brings in every month. Business owners need to examine existing income streams. Adding up all of the income sources will give the total monthly revenue. After having all 12-month revenue for the whole year, it is necessary to analyze the revenue trends to see if there is seasonality. By doing this, companies can be well prepared for down seasons to avoid losses.
Step 2: Tally Costs
The second step of budgeting is to add up all the fixed costs and variable costs. Fixed costs are expenses that charge the same price each month, while variable costs are those that charge depending on how much the company uses the service. Expenses such as rent are fixed costs, while office supplies and marketing would be variable costs. Business owners can scale the variable costs up or down to ensure the company stays afloat.
Step 3: Take Unexpected Costs into Consideration
Besides fixed and variable costs, there might be some additional one-time spending each month. These costs are usually unexpected, like the money used to purchase a new laptop when an old one crashed. When creating a budget, business owners must consider potential unexpected costs. It is a good idea to use a portion of surplus income to create a fund for unforeseen expenses. With the fund, unforeseen expenses could be handled when they arise.
Step 4: Create a Profit and Loss Statement
The last step of budgeting is to prepare a Profit and Loss Statement (P&L). The monthly P&L statement shows revenue and expenses and results in the profit or loss for a month. To create a P&L, business owners need to list all of the income and costs for the month, add them up accordingly, and subtract the costs from income. If the number is positive, it means that the company is profitable this month. The P&L is very useful to help business owners make financial decisions.