Money is the backbone of every business, whether big or small. Even before a shop or business is set up, we consider how to fund or finance it. Once it is up and running, a regular flow of finance is needed to meet all the incurring costs, and we expect to recover all these investments from the revenue and still garner some profit.
With money being involved in every stage of the business, it is absolutely crucial that we keep track of our expenses, revenues, loans, debts, and profits. This not only tells us about the present scenario but also helps us plan the way forward. The simplest way to do so is to prepare a yearly budget.
In simple terms, a budget is an estimate of the income and expenditure for a fixed period of time.
Why An SMB Needs A Budget
Many of us make the simple mistake of believing that since SMBs operate with limited funds, it is very easy to keep track of the details, and a budget is just a waste of time. They are wrong, and here’s how a clear cut budget helps a business:
- Making the management process more efficient.
- Help identify the sources of expense and keep them under control.
- Pointing out leftover funds that can be reinvested.
- Predicting slow months and helping prepare in advance.
- Estimating profit and helping plan investments.
- Providing a window into the future.
How to Create An Yearly Business Budget
This step-by-step guide on how to create a business budget will simplify the entire process for you. So, read along…
Step 1: Track Your Revenue
The first step in creating a budget is to tally your income sources. Add them up to find out how much money comes into your business at the end of the month. Once you have figured that out, it’s time you carry out the same exercise for at least a full year.
Step 2: Estimate Fixed Costs
Fixed costs of a business are those expenses that are recurring after every month, quarter, or year. These include rents, employee wages, debt repayments, taxes, insurance, etc. So, go ahead and list them together.
Step 3: Determine Variable Expenses
Not every item or service has a fixed cost every month, and these become the variable cost. Some examples are utility bills, transport costs, office supplies, etc. Since they are variable, there is always a provision of cutting down on them during tough times.
Step 4: Set Aside An Emergency Fund
Unexpected costs are, well, unexpected. So, it is important to always set aside some funds for unforeseen situations like an accident, a sudden fall in the economy, machinery breakdown, or even a natural disaster. While you’ll hope not to encounter these, you just can’t leave everything to chance.
Step 5: Put Them All Together in the P&L Statement
The Profit and Loss Statement is the summary of all your financial activities. With all the hard calculations being done in the previous steps, preparing your P&L report only requires some addition and subtraction.
Step 6: Outline A Plan for the Future
One of the underlying purposes of a budget is to prepare you for the future. Hence, the final step is all about that. On your P&L report, study the trends and estimate your journey for the next quarter or full year. If your business is a start-up, making precise assumptions may be difficult, but don’t worry, even a bad guess can lay the backbone for a good year ahead.
During the preparation of the budget, if you feel your business is running low on funds, you might consider getting a small business loan. For expert guidance, an easy application process, and quick loan disbursal, contact Gromor Finance today!