Whether you’re in denial or not, the new year is here! Make sure that you have a business plan in place for 2018. And that plan includes planning your business budget.
For some of us, budgeting is the most painful part of running a business. Why can’t we just do what we love? While you could dive into the new year without a plan, crafting a budget can help keep you on track with clear financial goals, an easy way to assess your performance and encourage a long-term mindset.
Sound worth it? Then your next question might be, how do I start?
What’s in a Business Budget Anyway?
While the logistics and amount of detail in a business budget will differ based on factors like the age of your company and your industry awareness, there are a few must-have components for every plan. Keep in mind that your budget is just part of your business plan, and yes, you do need both. While your plan might include new projects, an analysis of your competitors, and potential changes in the market, today we’ll just focus on the cash.
Every business budget should include three basic elements:
- Assessment of your current finances
- Projected revenue
- Estimated costs
It doesn’t sound so bad when you put it that way, does it?
Planning Your Business Budget
The first step to a budget is knowing where you stand. Are you covering your expenses or is your business still in the red? Are you keeping up with the growth of your business or falling behind? But determining if you have enough money to cover your current or potential costs is only one part of the assessment.
You also need to consider where you’re currently spending and whether it’s effective. You might find that you’re spending a lot on marketing, but not securing many new clients. If your current marketing strategies are producing a low ROI, you know that marketing channels should be a topic at your next meeting.
Your budget is tied to and can reveal information about other aspects of your business such as sales or marketing departments. If you’re a small business or solopreneur, you don’t need to worry about any of this; you make the decisions on your own or with a core team. But as your business grows, you may want to start developing separate budgets for each major department.
Knowing how much revenue you can expect is vital to a successful business budget and a successful business overall. Many small business owners make the mistake of saying they just don’t know. That’s the lazy route. No matter how young your company is, you have some information that can help you make an estimate. Use the numbers from the previous year (or last few months, if your company is very new), but be ready to make adjustments.
Did you experience a spike mid-year and has it remained consistent? Then you should base your projections on the latter half of the year. Has business been steadily declining? Swallow your pride and calculate a figure that appears realistic – no one outside of your business has to know. The amount you can realistically expect to make is not the same figure as your goals, so don’t feel like you’re limiting yourself with a lower projection.
It’s not easy to calculate an accurate projection of next year’s revenue, but you’ll only get better with practice.
Let’s say you have a humble business selling yarn crafts online. Your main variable cost would be the cost of yarn. The more you sell, the more yarn you’ll need to buy. But fixed costs remain the same whether you sell 100 crafts or just one. Examples of fixed costs include the cost of hosting a website and keeping a domain name. There’s also a third, less common type of cost: the one-off cost. As the name implies, this is a one-time expense such as a crochet training course to improve the quality of your goods or paying a web designer to revamp your website.
It’s easiest to calculate fixed costs, variable costs will be based on your projected revenue, and one-off costs may not be on your radar at all.
Remember, if planning a business budget is intimidating, start with the basics and then fill in the details of your assessment, revenue, and costs. Prepare for the new year early and get planning your business budget today!