Steps to Creating a Small Business Budget

Budgeting is one of the most important first steps a business needs to take in order to succeed. It’s important that you form a reasonable and accurate budget no matter how many customers you expect for your business. Businesses large and small have seen financial difficulties because of financing mistakes that could have been avoided with proper budgeting. Here are the most crucial steps you’ll need to form a small business budget.

Plan for the opening day

There's going to be a lot going on for your business’s first day. The opening isn’t going to be like any other day, as there will be lots of additional costs to consider. It requires extra planning and a much bigger budget.
You can break down the costs for "day one" operation into four different categories. The first thing you need to finance is the cost of the facility. It's the price of your business location if you have a physical store or the website costs of an online retailer. When you're renting out a location such as a building, you're going to have to consider the leasing costs on a monthly basis. Then you have the fixed asset costs. These cover the costs of the furniture, equipment, and vehicles that you need to set up your business. Computers and machinery also fall under fixed asset costs.
An initial supply of office supplies and promotional is also a must, and these costs need to be accounted for as well. Lastly, you have “other” costs that depend on the line of work you’re in. You might need licenses and permits which cost money, or you could be in need of an accountant to handle your business’s finances.
With all of these costs accounted for, you’ll have your business off to a good start. However, there’s a lot more to your budget than just the opening day.

Calculate your monthly expenses

After your opening day, you’ll have expenses that you have to keep track of on a monthly basis. These fixed expenses are going to remain constant, and they won’t depend on the number of customers you have each day. They'll become a regular part of your business’s budgeting and accounting and this is why you must calculate the exact costs you’ll have each and every single month.
Many of these expenses will simply be extensions of things you’ve set up for your opening day. If you’ve leased a space for your workplace, you’ll have to take into account the monthly rent payments. Utilities need to be covered for space, as your business will use a certain amount of electricity, water, and heating every day.
Then, you also have monthly expenses that are related to doing business with clients. Credit card processing and transactional fees are paid on a monthly basis. As you hire employees, their pay and benefits need to be handled regularly as well. If you've taken out a loan to start your business, you'll have to start paying off monthly instalments. All of these regular fees set a baseline for how much your business will have to earn to keep up with costs.

Estimate sales & profits

The most difficult part of your budget will be creating a budget for your business’s sales. The difficulty comes from not knowing how well your business will do in the beginning. There's no guarantee that you’ll establish a loyal consumer base in the first few months of operating, so you’ll have to create an estimate.
You should do one of three projections for your business. There’s the best-case scenario in which your business does better than expected, leading to an influx of customers right in the first month. It’s the most optimistic scenario, but it’s also highly unlikely. The worst-case scenario has your business see very few sales or regular customers. This would prove to be detrimental to your business, but it’s still a realistic option that you have to consider. Then there’s the most realistic scenario that’s somewhere in-between the previous two. This should be your main projection.
To be even more realistic, you have to assume that you won’t be able to collect all sales. If your collection percentage is normally around ninety per cent, include it with your estimate of sales. You also have to calculate the variable cost of sales, which depends on the number of sales itself. Handling all of this might be a bit difficult for a business as it’s starting out, which is why many owners opt to find a reliable personal accountant to handle the business’s finances instead. It’s a lot easier to focus on running the business when you have accurate accounting on your side.

Manage your cash flow

It’s important for every business to know how much money is going in and out every month. This is what’s called the cash flow of the business. It’s the key metric that keeps your business afloat. Profit is great, but it means next to nothing if there’s more money going out than there is going in. Managing your cash flow is what will help your business prosper.
To calculate your cash flow, you’ll want to combine the total collections of money from all monthly sales with the total costs of maintaining the business. Sales and collections will have different numbers, so keep that in mind. The cash flow statement requires the collections of your business to be calculated.
Consult your personal accountant based on the cash flow statement. You can then find out your business’s cash needs and whether or not you have to borrow for business capital.

Conclusion

Creating a budget for a small business is difficult, especially in the early stages of development. It’s still a necessary part of starting a business, and figuring out all the different quirks is what will get you off to a good start. Apply the above steps to your business plan and you’ll find creating a budget to be a lot easier than you would have previously anticipated.