How to Create a Budget

Starting or running a small business without a budget is like driving with your eyes closed. In order be successful, you need to have a clear idea of where your business stands financially at any given time. One way to do this is with an ongoing business budget..

Three basic components to a business budget Sales: Sales refer to how much total money your business brings in from all sources. A budget will involve an estimate or forecast of your future sales. Total costs: Total costs are what it costs your business to generate your sales. These include fixed costs (like rent), variable costs (like materials used to make your products), and semi-variable costs (like salaries). Profits: Profits are equal to revenues minus total costs. Since profit is the goal of business, your budget should include expenses that are low enough to earn you a decent return on your investment.

Sample Profit and Loss

Consider your current position Examine the previous years' revenues and make adjustments for the upcoming year. If you a new startup, you need to estimate your total sales, price per product, and do market research to examine what a business of your size can expect to earn. Remember that revenue forecasts are rarely accurate. The point is to provide the best possible estimate using the knowledge you have. Always be conservative. This means assume you will receive sales volumes and pricing on the low end of the possible range

Startup Costs Cost Item # of Months Monthly Cost One-Time Cost Total Cost MONTHLY COSTS Consultant(s) 2 5,000 $10,000 Advertising/Promotion/Web Site 500 $1,000 Postage/Shipping 100 $200 Supplies Communication/Telephone Utilities 4 1,000 $4,000 Insurance Bank Service Charges 25 $100 Repairs & Maintenance Professional Services - Legal, Accounting 2,500 Travel & Entertainment 3 $1,500 Miscellaneous 200 $800 Total Monthly Costs $32,600 ONE-TIME COSTS Furniture & Fixtures 2,000 Computer Equipment 10,000 Computer Software Security Deposit(s) Business Licenses/Permits/Fees Cash-On-Hand (Working Capital) Total One-Time $58,000 Total Startup Costs $90,600

Perform market research to determine pricing Examine businesses in your area that provide similar goods or services. Take note of the prices of their products or services. For example, assume you are opening a therapy practice. Therapists in your region may charge $100 to $200 per hour. Compare your qualifications, experience, and service offerings to your competition, and estimate your price. If you offer multiple products and services, make sure to research prices for those too

Estimate your sales volumes Do you have any customers or contracts lined up? If so, include these. You can then assume referrals from customers and advertising will add to these volumes over the year. Compare to existing businesses. If you have colleagues who have established businesses, ask them what their volumes were like early on. For a therapy practice, your colleagues may tell you during their first year they averaged about 10 client hours a week. Look at what drives sales volumes. If you are opening a therapy practice, for example, your reputation, referrals, and advertising will bring in people. You could decide that based on these resources, one new client every two weeks is reasonable. You could then go further and make an estimate that each client will pay for one hour a week, and last for an average of six months. Once again, remember that revenue forecasts are purely estimates.

Use past data Look at pricing. Do you have reason to believe your prices will increase or decrease? Look at volume. Are more people going to be purchasing your product or service? If your business has been growing by 2% annually, you can assume the same for the following year if no significant changes have occurred. If you plan on aggressively advertising, you could bump that up to 3%. Look at the market. Is your market growing? For example, imagine that you run a coffee shop in a downtown neighborhood. You may be aware that the neighborhood is rapidly growing due to new people moving in. This could be reason to add to your growth forecast.

Decide on your target profit margin Research online or ask a financial adviser what the typical margins for your kind of business should be. If 10% is typical for your business, you know that if you are forecasting $50,000 of revenues, your expenses should equal no more than $45,000.

Determine your fixed costs Add up all these costs to get an idea of your fixed costs for the next year. Fixed costs are costs that generally remain the same throughout the year, and they include things like rent, insurance, and property taxes. If you have past financial data, use these fixed costs and adjust them for any rent increases, bill increases, or new costs.

Estimate your variable costs The cost of raw materials and inventory to make your sales is one type of variable cost. Or, the cost of doing business when you are selling a service. Examples from group. Products Service Non-Profit

Budget List of Categories INCOME SOURCES: VARIABLE EXPENSES: Hourly Earnings Raw Materials Product Sales Contractor Wages Investment Income Commissions Loans Advertising Savings Other Marketing Costs Other Transportation FIXED COSTS: Travel & events Rent/Mortgage Printing Services Utilities ONE-TIME SPENDS: Salaries Computer Internet Furniture Government and bank fees Software Cell phone Office Supplies Website hosting Website Accounting Services Legal Services Insurance

Monthly Budget Template

TAKE THE LEAP Creating a monthly business budget may seem like a hassle; but, it’s essential. A budget gives you the ability to make conscientious financial decisions so your business can stay on track and grow. What else stands in your way of a balanced business budget? Are there any hurdles we’ve missed that currently have you paralyzed in the process?

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