Welcome to the topic “How to Create a Simple Business Budget in 2023”
Most new businesses fail—and that is not just our opinion. Pull up any statistic about startups and you’re sure to find a dark, gloomy image of the future for them. Statistically, your average startup will likely fail and shut down within three years of its conception.
The reasons for each failure may vary and can range from launching a product no one wants, executing horrible business operations, or following a dismal, below-par marketing strategy.
One thing that is common in almost all failing startups or new businesses is finance. No entrepreneur is ever keen on shutting down their business and only does so when a lack of finance forces them. Successful companies pivot their strategy and figure out the factors discussed above if they are given enough time to experiment and run.
If your startup fails to manage its financial resources effectively, your company has little time to test anything. Eventually, the owner runs out of cash to spend, and the business, thus, runs out of time to experiment.
Therefore, the company has to shut down to avoid further depleting the owner’s wealth or taking up even more loans. You could not only argue that in the case of startups, “money is time,” but also that financial management is the key to a business’s success.
This gloomy picture of startups need not scare you, however. Yes, indeed, managing startups’ finances are very hard. It is equally true that startups hurt their chances of success if they don’t manage said finances right, raising the stakes for management. The issue is more complicated because new entrepreneurs have little idea of managing their finances and have little or no records. So how do you deal with this?
The easiest way of fixing this “catch-22” is to make yourself a business budget.
What is a business budget?
A business budget is the forecast of money expected to come in and go out. Business budgets help you break down, predict revenue, and count every dollar spent. You create accurate estimates of the money you expect to make and assign a “job” to every dollar coming in. This “job” may be paying salaries, maintaining inventory, smooth working of any other business process or these dollars might be assigned to buying you the latest cars.
Breaking every dollar down to its jobs helps business owners make provisions for slow months and helps them understand their business’s position clearly. In short, a business budget will help you forecast revenue, plan where to spend it, and consequently help you see the difference between your expected and actual outcomes.
Why is a business budget important?
Of course, business plans are important for their clarity to the business owner. Without a comprehensive business budget, a business owner might underestimate or overestimate the amount of money they’re making. Both are equally detrimental to the company’s success, and having a business plan keeps the owner in touch with the actual earnings and profits of the company.
Moreover, a business plan helps break down each cost. Breaking down each charge opens your eyes to any redundant costs you may incur or any fees you’re spending too much on.
Your employees might be paying too much of your money on coffee, stationery, or anything that can be easily controlled. Only a coherent and expansive business budget will help you see where all your money is going and consequently help you fix all the leaks.
Furthermore, business plans help you plan for down months. Business plans, if expansive enough, will help you make provisions for your down months and will give you a level of clarity in your good months. A good business budget will keep you from overspending in good months and will also give you less stress during slow ones. In this way, business budgets are a good way of gaining clarity on your business.
Apart from gaining clarity, you can also use a business plan to test out the basic assumptions of your business. The lean startup method is a buzzword thrown around, but it means testing your hypotheses by setting up metrics for success. By having a business budget, you can test your assumptions. For example, you might predict X sales in your business budget based on the marketing strategy you’re following.
If—in the next six months—you only make half the sales you expected to, you will be able to outright reject or improve upon your marketing strategy. In this way, business budgets quickly show you that something is wrong with how you’re going about things.
How do I make a business budget?
Worry not; we’re here to help you out. Most online resources make it too complex, in our opinion. A business budget should not be something that scares entrepreneurs—after all, they have enough things to worry about already. Your business budget should be simple and flexible. It should not further complicate things for you and should be presentable to external stakeholders, potential investors and any other third party if the case may arise.
It must be noted, however, that there is no one format for making a business budget. You need to make a business budget thinking of your own needs and the needs of your third-party stakeholders. However, there are some things you should always keep in mind. The following are the main components of a business budget that you should be sure to include:
1. Revenue
Before planning out where to spend any money, you must first know how much money you will have. Before any household makes their monthly budget, they must know the amount of money they’ll be getting for that month. The same goes for business budget planning. Revenue, thus, becomes the first and often most important aspect of your business budget.
Since every other component depends on revenue, you must try to estimate your yearly income accurately. Your forecast should be moderately prudent to avoid any overspending but should not necessarily paint a dark, gloomy image that demoralizes you.
You need to be honest about your business and expected revenue for the upcoming year or six months, whatever period you’re planning. Often, data about the industry average and previous year’s sales make predicting revenue easier, so try to use data and analyze historical statistics wherever you can.
2. Fixed costs
Next, you need to list all the costs you’ll have to bear, no matter the output. These usually include rent for your office space, utilities, insurance, and any other cost you just cannot avoid, no matter the volume of your production. As a startup, you should minimize your fixed costs to reduce the risk associated with your business. Exceptions, like always, do exist.
3. Variable costs
After you take out all your fixed costs, try to figure out every cost associated with production. These costs may include materials bought or any other expense that changes with production levels. It’s best to list out variable costs in terms of production levels, with your total variable cost estimated according to the number of sales you expect to make in the revenue portion of your business budget. Coherence and unity are, of course, of great importance to the business budget’s helpfulness.
Bonus question: Where do salaries go?
Salaries are tricky in nature and can depend from case to case. In certain cases, you can account for them in the fixed cost area and vice versa. Of course, it depends on the nature of your workforce. The part-time work force is expected to be included in variable costs, but it is hard to consider your full-time workers as the same.
4. One-off or miscellaneous costs
Next, you need to make a provision for miscellaneous one-off costs. These costs are the “everything else we expect and not expects to spend money on” portion of your business budget. You might need new furniture and new operating systems or might even have to hire a professional cleaning service for a full office sanitizing procedure. This part is where you can break all those costs down.
5. Profit
Now we’re talking, right? Profit is a great motivator, and in this part of your business budget, you can subtract all the costs from your revenue and get your profit. You can not only daydream about spending all this money once you have this amount, but you can also use this value to attract investors and collaborators and establish legitimacy and trust in the market and industry you are working in.
Whatever the composition of your business budget ends up being, you must remember to make the business budget comprehensive, flexible and helpful. As long as your business budget helps you in the daily workings of your business, you need not worry about the format being followed.
Nevertheless, business budgets are a great tool for financial management, especially for startups and new businesses. Business budgets can help you plan out, analyze, and manage every dollar your business makes so that you can maximize the number of dollars you make.
If you need help creating and managing you business budget in 2023, contact us at Speed Financial Group. Our dedicated team of tax professionals is here to educate you on the various strategies to get the most bang for your buck and increase your bottom line.
Schedule a consultation today!
Also read “How Inflation Impacts Business Taxes“
