A large chunk of business success relies on accurate budgeting, the process of outlining your business revenue and expenses in order to lay the foundation for future business decisions.
All the cash you invest in a business goes into reaching the objectives you have for yourself and for your enterprise – but how would you know that you have enough capital and the right strategy to do so? By using budget plans, steps to these goals are made clear and attainable.
Use Spreadsheets for Both Detailed and Back-of-the-Envelope Budgets
For more detail-oriented entrepreneurs, you may make a comprehensive financial spreadsheet that details your startup costs, from marketing expenditures to enterprise software subscriptions, revenue breakdowns, existing assets and liabilities. You can download our spreadsheet template here if you’d like to try it out!
If you’d like to work out your budget through a back-of-the-envelope method, the first step is to record your sales figures, as well as additional sources of revenue. This includes loans, interest income, income from investments, and other expenditures.
Next, keep tab of fixed costs, which is everything you consistently spend from a month-to-month basis, such as insurance, bills, rent, salaries, and other fees.
Afterwards, consider your variable costs, which are purchases that don’t have a fixed amount and vary from month-to-month. In this category, you’ll find transportation costs, raw materials, marketing/advertising costs, events, and others. Lastly, account for possible purchases that happen only once. The amount of money you keep as profit should support you enough comfortably – but you should also keep enough cash in your business as a safety cushion for a rainy day or for investment opportunities.
The Next Step: Building Budget Projections
After you have collected a year of budget data, you will have an accurate financial picture of your business in its current state, while also allowing you to make intelligent assumptions that will help you assume its future state. Based on the information and documents you have garnered in the past year, you may create budget projections that will help you forecast future sales and expenses, which will then allow you to make better-informed decisions that bring you closer to achieving your profit goals.
To create financial projections, analyse the characteristics of the inflow and outflow of cash per month from your actual budget plan in the previous year. Based on last year’s budget, how much do you expect to spend, and exactly what do you expect to spend on? How much do you expect to earn, and what sources will you earn from particularly?
Compare how much your company made to the industry average and note down the details of each sale (when you were paid, how much is usually paid for that project in the industry). From there, you will be able to project your cash flow and annual income. How achievable are your goals for the next year based on these statistics? To make it easier for you to visualise, you can divide your annual budget by 12 to break it down further into monthly projected budgets.
Budgeting Helps You Analyse Your Business’ Performance
Budget projections serve as goals for your company to hit and hopefully exceed. Achieving these goals is a positive sign to keep doing what you’re doing while failing to align with your budget indicates opportunities for analysis on both your business’s finances and your previous judgments that led to the misalignment. You’ll be able to integrate the lessons you’ve learned into your next budget so that you can create an even more realistic budget each year and fully optimise your company’s finances.
Budgets are useful tools that are constant works in progress. Not only do they allow you present-time insight into how your business is performing versus your expectations, but they also reveal an overview of how well you executed your plans in the past year, letting you compare your flexible budget with the actual budget.
Overall, budgets help you monitor how well your business is doing, give you a realistic forecast of how much you will earn and spend, and aid greatly in making decisions for your enterprise. They are the keys to showing your own discipline in sticking with the initial plan, what works for your company, and what doesn’t. You can then incorporate these lessons into your next projected budget plan, as you continually optimise your spending, expand your business, and achieve your business goals.