Running a business is tough.
This is because, with the ever-growing operational demands, it’s easy to run out of money. Lack of proper financial planning and budgeting, an unprepared business owner can run into debt within split seconds.
Even in developed countries like the US, 64% of small business owners begin with $10,000 in capital, and reports state that only 40% of these businesses are profitable.
So that begs the question, “Where did the money go?”
Many business owners only keep an eagle eye on their monthly account balance but this doesn’t save their business if they don’t correctly track, plan and budget their business.
In this post, I will show you how to track, plan and prepare your small business budget so that you can steer your business towards success in the coming years.
But before then,
Why Should You Set Budgets And Track Your Small Business
Setting a budget and tracking the expenses of your small business will help you stay on top of your business numbers. This spreadsheet will open up your current operating costs and sales, that way, you can be sure that you have enough money to keep your business running.
It will also help you to prepare solutions to potential problems. That unexpected information of increased rent or seasonal drop in sales can be daunting, but having your financials right will guide you on where to see the extra cash to cover the loops.
And because you’re particular about your business growth, setting a budget and tracking it will help you ascertain your business next level and identify the cost of getting there.
How To Track, Plan And Prepare A Budget For Your Business
1. Identify your revenue
Your take-off step in planning your budget is to identify the paths that bring money into your business every month. This will be tagged as your income before other expenses are deducted.
Also, you should record the income flow for six months or more to identify the pattern so that you can at least predict the recurring months. This will guide you to understand your best sales seasons and forecast future turnovers.
2. Deduct your fixed costs
After calculating your monthly income, the next is to find the total of your fixed costs. This fixed cost is any operational cost that you pay every month. It could also be daily, weekly, or yearly.
For instance, your office rent, fueling generator, salary payment or data subscription.
Now deduct your fixed cost from your income.
3. Identify your variable expenses
Aside from your fixed costs, other costs vary from time to time. These variable expenses are not necessary for your business, but they’re good to have for business success.
Examples could be the cost of employee personal development, the experience of entertaining a premium client, replacing old equipment or travel costs for an urgent business trip. Most times, variable costs are operational costs around utilities.
Smart business owners try to lower these variable costs as much as they can during low-profit months so that they don’t over-eat into their profits. However, in buoyant months, they take advantage of it to create a stronger impression.
4. Set aside miscellaneous fund
Miscellaneous costs mostly arise when you least expect. So as much as you can, ensure that you prevent these unexpected costs when budgeting for your business by ensuring that you have extra cash at hand to sort them.
You can put aside an emergency fund to take care of this anytime it’s needed. This will put you on your toes so when an emergency happens say an equipment breakdown or replace faulty furniture.
That said, you run your business by this maxim: If your budget for a problem, the emergency never arises. And if the emergency does show up? Well, you’ve budgeted for it. It’s not an emergency then, is it?
5. Create your profit & loss statement
Having been abreast of all the above information, next is to determine your profit and loss statement, or profit and loss.
Just talking about profit and loss can bring up feelings of anxiety.
But never mind, because you’ve already done all the work. All you need is the principle of addition and subtraction: Sum up your income for the month, add the expenses for the same month, and subtract the cash flow-out from cash flow-in to actualise your net worth for the period.
Should you record a surplus after this calculation, then you’re at the top of your business. However, it’s a deficit if the expenditure outweighs the income. Though, small businesses aren’t profitable every month, let alone every year, your strategy as a business owner speaks for the growth of your business. A starter can have it a bit eventful, anyway.
Since the cash flow is the oxygen of all businesses, you need to run this exercise on a fixed regular basis e.g, weekly, monthly or annually, depending on your growing interest in the business.
6. Outline your forward-looking business budget
Whether you’re a beginner or you’ve been doing this a while, projecting what will happen to your business in the future is educated guesswork. Supposing you’ve been in business for a while, that’ll certainly help the accuracy of those guesses (as you might, well, guess). A starter with business orientation can as well be in form here.
With your profit and loss statement, you have been equipped with an historical document that reveals the past of your business. Upcoming is to bring your budget to life. Mind you, this is a forward-thinking and future-focused document.
For this step, your profit and loss document will serve as a reference that guides your understanding of the seasonal ups and downs of your business. Hence, you note which investments in your business are worth repeating, what needs adjustment, and what you should avoid completely in the future.
Also, You might leverage the favourable information and decide to hire more staff and extend your hours during certain times of the year, making your business even more profitable in the months that demand is highest.
Once you’re able to track, plan and excellently prepare your small business budget, chances are you’ll effortlessly grow that business into a conglomerate.
As a business owner, you should first, understand that you need support to grow your business. Secondly, you need continuous knowledge as it is the best way to equip you for potential success.