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          New Business Tip: How to build the best budget for your small business

          By Better Business Bureau. August 3, 2023.
          Small business owner managing his money

          (Getty)

          Having cash on hand is what keeps businesses afloat. But with so many financial variables like tools, equipment, payroll and rent, it’s no surprise that money is the primary concern for new business owners. A simple Google search for “What is the main reason small businesses fail?” will point you to countless articles listing: “financing,” “cash flow,” and “insufficient capital.”

          The solution is simple: Commit to the financial management skills needed to ensure a successful launch (and sustained business model). While your idea may be unique and fit perfectly in your corner of the marketplace, paying too much for employees, supplies, or rent can quickly eat up your profits. Most small business owners wear many hats, but the successful ones are experts in budgeting to maximize profit margins.

          Keep your small business on track by establishing and maintaining an effective budget that helps increase profits. An understanding of these basics is a great place to get started.

          Importance of developing a business budget

          A business budget differs from a personal budget or your initial start-up budget. While certain costs may come up once a year or once a quarter, your monthly operating budget is focused on recurring costs and incoming revenue. 

          Creating a business budget allows you to track expenses, allocate money and forecast revenue based on your needs. This is even more important for seasonal small businesses, like tax preparation specialists or lawn care services, that must plan for the leaner months. Outlining the monthly highs and lows lets you plan ahead, cut expenses or dip into reserve funds if necessary.

          From a trust standpoint, an effective budget better allows your small business to uphold its commitments. BBB Accredited Businesses are charged with honoring promises in the marketplace, including contracts made with suppliers, landlords, and employees. Fulfilling those commitments is easier when expenses are properly managed.

          Components of a business budget

          Business budgets have several main components. Some online tools can help with the "nuts and bolts" of budgetary planning. Find one that suits your needs and input the relevant numbers to start. Remember, save copies of invoices and receipts as a budget backup and for possible tax filing or IRS disputes.

          Estimated revenue: This is what you plan to take in from sales each month. After you’ve been in business for over a year, you’ll look at historical numbers, but new businesses can use industry averages. As you record these data points, note where you got certain figures. For example, a café owner may have gained business due to an occurrence of a local convention.

          This snapshot can help you determine where to cut expenses and how to tighten your budget to pursue short- and long-term financial goals. Some revenue examples:

          • Sales revenue
          • Interest on investments
          • Rental property income

          Fixed costs: These are costs that remain the same each month. Knowing how much you must sell or how many clients you need to cover fixed expenses is essential to making smart business decisions, especially when pricing goods or services. Having a handle on your fixed costs provides a benchmark for your break-even point. Some examples of fixed costs:

          • Rent
          • Internet/phone
          • Website hosting
          • Payroll (salaried employees)
          • Your personal salary (you should be paying yourself!)
          • Insurance premiums
          • Monthly subscriptions
          • Professional membership dues
          • Mortgage/loan payments
          • Property taxes
          • Fees to maintain professional licenses or certificates

          Variable costs: Also referred to as controllable costs, these expenses vary depending on your volume of business. Remember, because they vary from month to month, these are estimates. Use market research or anticipate these costs to the best of your abilities. Some examples of variable costs:

          • Supplies for goods you produce
          • Hourly employee wages
          • Seasonal advertising
          • Usage-based utilities (like electric or gas bills)
          • Shipping costs
          • Sales commissions
          • Travel costs
          • Income/sales taxes
          • Merchant fees

          Irregular costs: These costs may not occur every month, such as professional memberships, equipment upgrades or new office furniture.

          Some industries also have professional organizations that, while vital to networking, also may have steep dues. Consider paying your dues in a lump sum if you have an especially busy month, or see if you can break it into a monthly cost that's more manageable with your cash flow.

          • Equipment upgrades
          • New office furniture
          • Dues for professional memberships

          Cash flow: This term refers to the money coming in and out of your business. Positive cash flow means you have more money coming in than going out. Negative cash flow is the opposite. Your budget should be able to give you a snapshot of your cash flow at any given point, assuming you're entering your expenses and revenue in a timely and accurate manner.

          Understanding your cash flow allows planning, investing, and handling unplanned expenses. In addition, you can use your cash flow to plan purchases and determine your billing cycle. Learn more about cash flow and money management.

          Profit: This is the money left after paying expenses. You may save profits for a rainy day, reinvest in the business or keep these funds for yourself. If your small business profit margins aren't where you anticipated, it may be time to cut costs, raise prices or drive more business with a larger advertising budget.

          Short-term financial planning

          A business budget should be flexible. Some months, certain line items are higher — like when you may have to pay a balloon payment for insurance or dues to professional organizations and licensing. If you can, factor these expenses during months where you forecast more revenue, eliminating the need to dip into reserves or make a lean month leaner.

          Short-term financial planning is essential for businesses in their first year or two. You'll use your cash flow snapshots to help make expense decisions for the following month, such as hiring a new employee, launching a new product line, or investing in new equipment.

          Your short-term planning should also include plans for the positive cash flow of your business. Will you keep some in a business account, invest profits in an investment-bearing account, or apply extra cash to future expenses? Making smart decisions with positive cash flow can also help your business during lean times.

          Long-term financial goals

          Long-term planning centers on your long-term goals for your business. These could include relocating to a more desirable area, realizing a sustainable business plan to fund your retirement, or diversifying into other markets, product lines, or services.

          You may set aside some monthly profits toward these goals – either saving for new equipment or investing your money for passive income. You may even choose to create a business plan that lines out benchmark goals for financial success, reputation in the community, and your own expertise within the business.

          Making your business budget work for you

          Your business budget works when you use the right numbers to make the right decisions. Use it to track your expenses and see where you spend too much. It’s also useful for long-term investments or as concrete data when approaching banks for loans. Creating an analytics program for cyclical businesses that shows the ebbs and flows of cash can define your business cycles and even help you plan everything from vacations to new machinery.

          Takeaway

          A budget is a key component to growing your labor of love. Creating one for your small business can help you reach long-term goals, retire successfully, diversify, and reinvest.

          A solid budget also puts you in a better position to approach banks for a small business loan. Banks like to know they're investing well and will see their loan repaid. When you demonstrate that you have a handle on your cash flow, you're a more attractive investment to lenders.

          For new businesses, it's essential to watch your pennies so that the dollars take care of themselves. Many budget templates are online, but the trick is to start one immediately. Keep on top of it by entering your expenses and revenue promptly and accurately. And most importantly, revisit your budget sheet each month and adjust as needed.

          You can find more tips on growing your small business at the BBB.

          Visit BBB's new business hub to learn more about starting your own business!