How to Build a Business Budget
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A well-structured business budget is the foundation of financial success. Whether you’re a startup, small business, or a growing company, having a clear budget helps you manage expenses, allocate resources, and plan for further growth. As your trusted financial partner, we will walk you through the process of building a solid business budget with detailed explanations and actionable steps.
Why a Business Budget is Important
A business budget provides a financial roadmap that allows you to:
- Track income and expenses systematically
- Control costs and reduce financial waste
- Forecast financial needs for better planning
- Improve decision-making based on data-driven insights
- Increase profitability through cost efficiency
- Secure funding or investment by demonstrating financial responsibility
Without establishing a budget, businesses often struggle with cash flow problems, unexpected expenses, and inefficient financial planning which can lead to business failure.
Step 1 – Analyze Revenue
One of the first steps in any budgeting exercise is to look at your existing business and find all your sources of revenue. Revenue is the money generated before expenses are deducted. You’ll need to add all income sources together to determine how much money comes into your business monthly. It’s important to do this for multiple months, preferably the previous 12 months, provided you have that much data available.
Be sure to take note of how your business’s monthly income changes over time and try to look for seasonal patterns. For example, your business may experience a slump after the holidays or during the summer months. Understanding these seasonal changes will help you prepare for the leaner months and give you time to build a financial cushion.
You can then use these historic numbers and trends to make revenue projections for future months.
Sources of income can include:
- Sales revenue from products or services
- Investments or funding from external sources
- Other sources like rental income, affiliate earnings, or licensing fees
Step 2 – List & Subtract Fixed Costs
The next step in creating a business budget involves adding up all your historic fixed costs and using them to reliably predict future ones. Fixed costs are those that stay the same no matter how much income your business is generating. They could occur daily, weekly, monthly, or yearly, so be sure to get as much data as you can.
Examples of fixed costs for your business might include:
- Rent
- Debt Repayment
- Employee Salaries
- Depreciation of Assets
- Property Taxes
- Insurance
Step 3 – Identify & Subtract Variable Costs
As you start to compile your fixed costs, you may notice expenses that aren’t as consistent. Unlike fixed costs, variable expenses fluctuate based on business activity and production levels. It’s important to pay attention to how they fluctuate over time in your business, so you can use that information to estimate future variable costs.
Some examples of variable expenses include:
- Hourly employee wages
- Raw materials
- Utility costs that change depending on business activity
Step 4 – Establish an Emergency Fund for Unexpected Expenses
Every business faces unexpected costs, such as equipment breakdowns, emergency repairs, or sudden drops in revenue. To safeguard your business, you should allocate a portion of your budget to an emergency fund.
The best practices for starting an emergency fund include:
- Saving at Least 10% of Monthly Revenue
- Keeping Funds Liquid
- Using Business Credit Wisely
- Planning for Worst Case Scenarios
Not sure where to start with your emergency fund? Read our blog to learn more.
Step 5 – Allocate for Growth & Development
To remain competitive in your market, you should consider allocating funds for growth and expansion, such as:
- Expanding product lines or services to reach new markets
- Upgrading technology and business systems for efficiency
- Hiring additional staff to support business operations
- Investing in branding and marketing for increased brand awareness
- Research and development to innovate and stay ahead of competitors
Step 6 – Finalize Your Business Budget
Now that you’ve determined all your expenses and revenue for your business, it’s time to calculate your net income. You can do this by subtracting your total expenses from the total revenue. If your net income is positive, this means your business is earning a profit, however, if the net income is negative, this means your business is losing money. In these cases, it’s important not to panic. Your business may not be profitable every month, especially if you’re a small business owner or just starting out. Just be mindful as you move forward and consider looking for areas to cut back on costs or opportunities to earn extra revenue.
The Bottom Line
Building a detailed business budget is a crucial step toward financial stability and growth. By tracking your income, managing your expenses, and continuously refining your budget, your business can thrive even in uncertain economic conditions. Implementing these steps to setting up your business budget will empower you to make informed financial decisions, optimize spending, and scale your business successfully.
Ready to set your business up for success? Our dedicated commercial lending team is here to help every step of the way. Give us a call today at 478-923-3773 x.2240 for more information about our business suite products that are sure to fit your professional needs!
Read our other blog articles to help you gain the financial knowledge you need to succeed.