Small Business Budgeting: A Necessary Task

By Leo Rodriguez Dec 4, 2023

Learn how properly budgeting can ensure the financial stability and growth of your small business.

So, you are now the proud owner of a fresh, new small business and you are brimming with entrepreneurial spirit and expertise of your industry. However, the accounting side, especially budgeting, is not your strongest suit. Thankfully, creating a budget for your business, even a relatively accurate estimation, is simpler than it appears.

Budgeting is vital for small businesses. It allows you to ascertain whether the business has adequate funds to support operations, facilitate business expansion, or provide personal income. Without a strategic budget, a business could either overspend, resulting in a fiscal deficit, or underspend, which could stunt business growth.

Every entrepreneur has their own unique budgeting method. However, there are several common key factors everyone should consider including in their budget. Most businesses will need to consider rent or mortgage, utility bills, payroll, cost of goods sold, interest, and tax payments. These are just a handful of the necessary expenses that any business owner should factor into their budget when starting or taking over a business.

To estimate forthcoming revenue of an existing business, an easy approach is to scrutinize recent financial trends. If you are starting afresh, you will need to make educated assumptions based on factors like location, operating hours, and by investigating other local businesses. Visiting comparable businesses on sale and inquiring about their weekly revenues and customer patterns can provide valuable insights.

Once you've gathered necessary data, correlate your business's revenue with its expenses. The aim is to calculate what your weekly overhead, utilities, labour, raw materials costs etc., are expected to be. From here, you can predict whether you'll have a surplus to reinvest in your business or save. Alternatively, these figures may reveal that your business will need to increase weekly revenue to support additional staffing costs.

To assist in this necessary task, here are six essential tips to construct your own foolproof small business budget:

  1. Every business is unique, but certain principles apply universally. Dedicate some time to research online about your industry, converse with local businesses, visit a library, and refer to the Internal Revenue Service (IRS) website to understand what proportion of your revenue will be assigned to various costs. Small businesses often experience considerable fluctuation as they are more susceptible to industry lows than larger, diversified rivals. You're aiming for an average here, not specifics.

  2. Prior to starting or purchasing a business, design a spreadsheet to predict what total funds and what percentage of your revenue will be required for raw materials and associated costs. It's crucial to contact potential suppliers before you proceed further. Repeat this process for any rent, taxes, insurance payments etc. It's also crucial to comprehend types of budgets required for your business set-up.

  3. Although future revenue growth or certain fixed or controllable expenses can be forecasted, remember these are estimations and they may vary. Therefore, factor in some contingency and ensure sufficient funds before expanding the business or hiring new staff.

  4. In difficult times, when necessary funds are needed to cover crucial bills or capture opportunities, consider cost-cutting. Target those expenses which can be controlled significantly. Waiting until the start of a new billing cycle or leveraging favourable pay terms offered by suppliers can provide much-needed relief.

  5. Many businesses draft annual budgets; however, small businesses, given their unpredictable nature, should do this more frequently. Having a budgeting calendar can be a useful tool to ensure the business has adequate funds to cover its needs.

  6. Don't hesitate to shop around for cost-effective suppliers or service providers for your business. This process should be repeated at various stages - when purchasing or starting a business, when setting annual or monthly budgets, and during periodic business reviews.

Budgeting, while straightforward, is an invaluable tool for small business owners. It helps to forecast, and then match, present and future revenue to expenses. This ensures sufficient funds to keep the business operating smoothly, facilitate growth, compete effectively, and maintain a solid emergency fund.

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