No business owner likes creating a budget, but all of them like the results of having one. The budgeting process can seem so daunting that most small businesses operate without this essential financial roadmap. Unfortunately, much greater frustration results from not having sound control over business operations.
The process of creating a small business budget is actually much easier than small business owners realize. If they follow the right process, a workable budget will unfold. This allows a small business to have targets and make adjustments in the right areas in order to achieve the best results.
A small business budget is a guideline for deploying resources to attain sales and profit objectives. In order to maximize profit, sales are generated from the optimal use of money for staff, equipment, marketing, and other expenditures.
Getting Started with Small Business Budgeting
Surprisingly, creating a small business budget successfully often begins by staring out the window window or at a wall. This is the thinking stage. A budgeter must consider all the types of input costs for the business. After making this mental list of tangible needs, the actual amount of cost for each of them is investigated.
Costs are measured based upon the required resources to produce a projected sales level. Not enough money available to cover the costs for generating $1,000,000 of sales? Then, cut back on the sales projection until the required outlay for costs is covered by available funds.
A 12-month budget is all that a small business requires. The guesswork beyond that point is not particularly reliable. When the budget for profit is complete, some simple adjustments create a cash flow budget. This is an essential step. The profit budget considers spending and resulting sales revenue. But the cash flow budget moves the numbers around based upon when customers pay and when bills are due for expenditures.
Using the Budget Tool
At the end of the first 12-month small business budget, compare actual results to the to the budgeted amounts. Accurate forecasts improve with practice. The next 12-month budget will be more reliable than before because of the learning process.
In fact, frequent comparison of actual performance to a budget is advisable. This permits determination of any variances in order to implement improvements. There are always trade-offs in business. Whenever an unexpected expenditure occurs, make cuts in other budget categories. Focus on spending that maximizes profit.
Input From Others on Your Budget
Successful small business budget preparation requires input from others. It must involve all members of a management team. For solo business operators, an outside adviser is extremely valuable. This is someone who will ask questions in order to assure that all the forecasted assumptions are defensible.
With a business budget, there’s always plenty of money to cover the costs of continuing operations as well as expansion. In addition, realistic dates are set for completing projects or reaching new sales plateaus on time.
Don’t Sweat the Small Stuff
There’s less pressure to making a small business budget when you remember that precise figures are not necessary. A budget is a guideline meant to provide direction. It’s a tool for charting the right course of action. The purpose of a budget is to simplify business management in order to create sustainable profit, not drive managers crazy over small details. So don’t sweat the small stuff, and focus on creating guidelines that will keep your small business profitable.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.