Your budget will assist you when tracking the flow and progress of your business by providing you with a picture of how much you are spending and in which areas you are exceeding your projected spending limits. A budget can be prepared for a specific area such as promotion and marketing or a special project or as an overall guideline for your small business.
To formulate your budget, you will come up with a reasonable projection of your sales. The budget will set forth the cash available to the business. For a new business you will include the funding you have obtained through personal financing, loans, investments, selling shares of stock and other sources. Once you have a realistic forecast of the money you anticipate having available, you can look at the potential categories of expenses and determine a realistic amount to spend in each category. Most budgets are works in progress with several revisions.
You need to establish several numbers, including the total you anticipate spending in each category and a finite ceiling, or maximum on spending that you do not plan to exceed. Create your numbers based on specific research. For example, you should have a good idea of the types of advertising that will best benefit your business and get realistic costs for such advertising options. Then determine an amount that will benefit you in the advertising category. Can you, for example, reach your target market for $10,000 per month? If you are budgeting for this category in a major market, the answer is probably no. In a small market, however, this might serve as a workable number. For a small locally based business you might start with a much smaller amount.
You will also need to evaluate exactly how many employees you need to operate your business. Therefore, you should research the going rate of pay for such services and look into the cost of benefits packages. Study the workforce statistics in your area or region and see if you can offer a comparable package to attract quality employees. Then budget the proper amount for salaries.
Remember to include rent, taxes, insurances and all other necessary expenses. You will then have to prioritize and make adjustments as you go. Obviously, you won’t be able to change the amount you pay in rent, but you can change the amount you put toward marketing if there is not a sufficient amount left in your budget. It’s always better to be conservative than to make unrealistic assumptions and base your numbers on pie-in-the sky hopeful thinking. It’s also advantageous to give yourself some room when budgeting for purchases.
Using a previous budget as a guideline is always advisable. From year to year a business will typically need to make various adjustments, but the basic categories of expenses typically remain the same. If you are starting a new business, look for similar business models to your company. Keep in mind that such a similar business should be serving a similar market.
Timing also needs to be factored into your budget. Many businesses have peak seasons where revenue is higher and times of the year where they have additional expenses. For example, a seasonal business might not budget for advertising costs in its quiet time of year but budget more money toward advertising just prior to its busy season.
Here are some budget tips:
Set maximum spending limits that you won’t exceed and monitor your budget closely so that you’ll know when your spending is approaching such category limits. Don’t juggle unless you absolutely have to. Try not to take from one pocket and move to another too often. It becomes increasingly harder to balance the budget if you keep moving money around. Be realistic with your projections. Make sure everything is clearly explained. While different businesses may categorize items in their own various ways, what matters for your business is that you can look at the budget and understand which items fall under which categories. Note: Go over each category carefully with your accountant, bookkeeper or anyone else who is working on your financial statements. Over-budget for areas in which you are more likely to have unexpected expenditures.