using a calculator to budget for tax withholdings

Creating a Budget for Your Small Business

One of the most crucial things every new business owner must do is to create a company budget. You want a budget that’s flexible enough to handle future expenses, but also manage your existing revenue, and cash needs. A budget is also a critical tool of your startup business plan.

One of the key challenges with crafting your startup budget is, you don’t have past data. A budget can help ensure you’re profitable, taking into account forecasted income and expenses — frequently called profit and loss statement. Before you start, think about why you need to spare some time to create a small business budget. You can use a budget for other reasons other than for bank financing. 

So, for starters, what is a business budget? 

A budget is a plan that stipulates how you will spend your finances every month or year. 

Managing a budget will benefit you in the following ways:

• Project the revenue you expect.
• Plan how and where to spend that income. 
• Deduce the difference between reality and plan.

What makes an incredible budget?

A good budget needs to be flexible and simple. If situations change, you can adjust your budget to give you a clear, panoramic picture of your financial standings. 

The best way to budget is to examine all your income sources to know what money your business makes on a monthly basis. When you make money, ensure that you calculate the revenue. Revenue is calculated as all the income that your company collects before you deduct expenses. What remains after subtracting expenses is profit. 

Once you know all your income channels, determine your monthly income. You should do this for several months and also for the last 12 months, but as long as you have sufficient data.With sufficient data, you can calculate the performance of your monthly income and look for seasonal patterns. 

Looking at the Research Costs

Researching on costs will help you prepare for unexpected events. Unexpected expenses for instance, sets you off track and make it harder for you to achieve your goals. If you set your budget for a given cost and you discover that you need more money later, then the profit being realized from the sales will be reduced. This places your business in a bad financial state because you will have to figure out how you will increase profit and revenue to offset the high expenses. 

Have a Contingency Fund for Unexpected Expenses

Whether you have business experience or not, you definitely know once in a while costs do not come around when it is convenient. These costs normally come up when you do not expect them, more so when you have a tight budget. You should stop unexpected costs when you are creating budget for your business by ensuring you have additional money on hand and plan for such contingencies within the budget.

While it is easy to spend your additional income on variable costs, place some cash aside as emergency fund. This way, you will be prepared if equipment breaks down and requires repair or if you want to replace inventory damaging by flooding. Alternatively, you can consider a small business loan. However, many options are better than fewer.

Prepare a Profit & Loss Statement

Once you have all the information above, you can now prepare a profit & loss statement. 

About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.