Starting a new business is like going on an exciting adventure, and the preparation is a huge part of making the most out it. In this adventure, creating a business budget is the indispensable groundwork to your company’s success.
Some people are still apprehensive when it comes to the idea of creating a business budget. They see the process as restrictive, as if it’s reminding them of all the things they want to, but can’t have.
Some argue that creating a business budget is impractical since they don’t exactly know how much money the business would rake in in a week, or a month. They think budgeting is expendable—an outdated part of the entire process involved in building a business.
A budget increases your chances of succeeding by anticipating how your money would circulate in your business by putting future needs side by side with potential profits. This forward-thinking strategy could help you spot financial issues early on.
Now that we’ve established the importance of making a business budget, you can start drafting yours. What are the steps in drafting an SME budget?
1. Determine a realistic target profit. If you have been in the business for a while, take your company’s most recent financial statements, and use those as a basis for developing your sales and profit target. If not, make an assumption grounded on research: on recent trends in the business, on your geographic area, on the revenue made by other local businesses.
2. Calculate your operating expenses. Create an itemized list of the fixed and variable expenses you incurred during the year. Figure out the average weekly expense for overhead, utilities, labor, raw materials, etc. Using those figures, determine whether you’ll have extra money to expand your business, or if you need to generate more in order to sustain your expenses.
3. Determine how your business is doing by calculating the Gross Profit Margin. This is how you figure out your business’ financial health; it is the money left over from revenues, after accounting for the cost of goods sold. The figure that you get from that formula represents the money that you could use to pay for additional expenses and/or the money that you have as savings. This is the leeway your business has: without an adequate GPM, a company is not ready to build for the future.
4. Adjust accordingly. Based on the numbers you got from the preceding steps, adjust. Do you need to reduce expenses? Add new employees to increase the profits? Purchase fewer new supplies? Do so, if necessary.
Always remember that in the process of creating a business budget, you have to use realistic figures. Setting up a business is a risk in itself. If you are given a chance to somehow minimize, if not completely mitigate the risk, why wouldn’t you take it? After all, your business is your passion. It’s the adventure of a lifetime. Prepare accordingly—and it will be well worth it.
Need help in preparing business budget drafts? Get more information by visiting the D&V website.