An operating budget is a critical component of any successful business; be it for profit or nonprofit. Business owners use the information to track progress, plan for growth, and adjust business practices to maximize profits. Before you can make money, you need to know how to spend it. It would help if you looked at the budget like a road map to success. Below you will understand the importance of a budget, the components, and how to draft one for your small business.
Why a Small Business Operating Budget Is Important
A budget helps business owners assess funds, spending requirements, and profits needed. However, there are other important reasons. Banks and financial institutions review your budget to evaluate loan opportunities. Employees use the information to assess the health of the company to see if they are willing to invest their time and effort into working for you.
The goals outlined in the drafted budget allow the employees to feel like part of the team. More importantly, they know exactly what you want from them and how to help the company succeed. Lastly, a budget can help you determine funds needed for labor and materials, cost of operations, start-up costs, required revenue goals, and an estimate of expected profits.
Budget Components
There are three main components. You should be able to detail revenues, costs, and profits. This information, known as cash flow, is needed to calculate the amount available for capital improvements or expenses. This should be calculated yearly and broken down into 12 months with blank columns next to estimates. The empty columns allow you to compare actual results to estimated projections as the year progresses. This can be performed with the help of a trained professional, such as an accountant, or by yourself using financial software, or worksheets, or templates.
Small Business Administration Definitions
The Small Business Administration (SBA) is a government agency that provides support to entrepreneurs and small businesses. The SBA defines several essential components to a successful budget. At the core, the SBA states that it should operate like a simple mathematical equation: sales are equal to the total cost plus profit. Sales are just your company’s revenue. Total cost and expenses are what you need to spend or do to earn sales. Fees are divided into three categories. Fixed costs remain flat over time concerning transactions, such as rent or insurance. Variable costs adjust as sales fluctuate. The number of raw materials needed to produce inventory, for example, increases as your sales do. Semi-variable prices are fixed costs that are influenced by the volume and quality of business, such as employee salaries or advertising.
Drafting a Budget
To start drafting, you first need to collect previous budgets and reports of sales and expenses. Next, list fixed costs that require payment regardless of sales. This includes rent, specific salaries, insurance, and regularly occurring losses. You will also need to compile a list of estimated expenses that can vary, such as the cost of raw materials or advertising cost. You may also want to list unexpected expenses like legal fees or repairs. While they may not occur, it is a good idea to plan on them arising.
Review sales reports to determine targets for the year. A financial projection can help determine the outcome of products or services according to market research. Once all this data is compiled, you can combine it into your budget. You can use financial software, spreadsheets, or hire a professional.
Tips and Tricks
With a properly constructed budget, you are informed of issues quickly. When such problems arise, there are some tips and tricks to help get your business back on track.
-You should review your figures. Make sure all the data and estimates are correct. Sometimes businesses grow faster than budgets are examined, resulting in complications.
– Freeze expenses such as raises, new hires, or bonuses until your business is stable. You should also avoid starting new projects, which can only exacerbate the issue.
-If you need to cut expenses, you can lay off extraneous employees and shut down facilities. This will result in a decrease in morale. However, if you can get everything back on track, you may be able to rehire and reopen.
A budget is a simple tool. It is an estimate of how your business will perform financially based on previous sales and revenue reports. Though it is simple, it is still an essential addition to your financial tool belt. With the information, you can predict performance, efficiently manage resources, and ensure stable cash flow.