SME Tips

Your Guide to Successful Small Business Budgeting in 2022

November 10, 2021

Small business budgeting is an essential part of your company’s success. Without a proper budget, businesses often spin their wheels and fail to become profitable into the future.

Here, we’ll outline the 7 steps to building a small business budget that can take your company to the next level.

Before Small Business Budgeting is Underway, Consider the Following

Industry Standards

Not all small business budgeting practices are created equally across industries. While there will be significant overlap, there are likely nuances within your industry that you want to account for.

Search the internet, check the IRS website, and talk with local business owners in your niche before diving into your small business budget.

Remember to Review Your Costs Periodically

Budgeting is not a one-and-done occurrence. You’ll need to commit to undertaking small business budgeting in regular intervals -- think quarterly, semi-annually, and/or annually. Doing so will alert you of any problems sooner rather than later and help you quickly make changes.

Now, onto the 7 steps you should take when budgeting for small businesses.

Step 1: Look at Your Revenue

Business budgeting of any kind requires starting with your revenue, and small business budgeting is no different. Look back in time and determine your business’ income sources -- add them together to determine how much revenue your company generates per month.

Sources of revenue include selling products, subscriptions, resales, and more.

Remember that at this point, you’re calculating revenue, not profit. This means you’re not accounting for any expenses yet.

Step 2: Subtract Out Fixed Costs

Now that you know your monthly revenue total, your small business budgeting process requires understanding fixed costs. “Fixed costs” are defined as costs that don’t change in the face of an increase or decrease in sales. These expenses need to be paid regardless of business status.

Examples of fixed costs include:

  • Insurances
  • Rent
  • Interest expenses
  • Depreciation
  • Taxes

From here, do the following:

Income - Fixed Costs = ?

...and move on to step 3.

Step 3: Consider Variable Expenses

When you begin your search for fixed costs, you’ll likely notice some expenses that fluctuate. Small business budgeting must take into account variable expenses, too.

Variable costs change depending on how much of the service you use. These can include:

  • Office supplies
  • Utilities
  • Your own salary (it should grow as your business does)
  • Marketing expenses

At this point, also take note of discretionary expenses. These aren’t strictly necessary, but they’re nice to have. You can include these as part of variable costs. Items such as education would be classified as discretionary because they can grow your business but aren’t essential to its development.

Step 4: Predict One-Time Costs

The final expense you want to look out for is one-time costs. These are expenses you foresee soon that should only happen once -- or once in a blue moon. This might be a laptop or educational course.

Setting aside the financial resources in advance allows you to take advantage of these opportunities and not worry about cutting into your business’ profit.

Step 5: Set Aside Emergency Funds

Small business budgeting must account for emergency or unexpected costs. Every business owner runs into these types of expenses at some point (COVID is an excellent recent example), and you want to be prepared. Failing to save for emergency expenses can bankrupt your company.

These costs tend to arise when you least expect them, and being financially strapped won’t help. You can rest easy knowing you’re building an emergency fund.

Set aside revenue each month dedicated solely to unexpected costs. Don’t touch them for any other reason. That way, when an emergency arises, it’s not so much of an emergency.

Step 6: Make a Profit and Loss (P&L) Statement

Your path to optimum small business budgeting needs to include the formulation of a P&L statement. Using information from the above steps, start adding and subtracting. Add up all of your income and expenses for the month, subtract expenses from the income, and look for a positive number.

A positive number means you’ve made a profit, whereas a negative one means you took a loss. While many small business owners may get anxious about a loss month, don’t fear. That’s very normal as your business works through kinks and continues to grow.

Here are some P&L templates you can use to make this part of small business budgeting easier.

Step 7: Put it All Together to Form Your Small Business Budget

P&L statements are historical, meaning they speak to the past performance of your business. The final component of small business budgeting is to predict changes to your business’ finances into the future.

At the end of the day, this is educated guesswork. But, predicting the future based on past results is what forms your budget.

Using your P&L statement, look for specific trends:

  • Seasonal changes due to travel, supply limitations, weather, and more
  • Big supply purchases
  • Your most profitable months

For instance, if you run an ice cream store, profits will likely be higher during the summer when people crave cold foods. Understanding these trends helps you build an as-accurate-as-possible budget for the future.

You Need the Right Tools

Budgeting by hand is old-fashioned and a big waste of time. It also is far more likely to lead to errors.

Before you begin small business budgeting, you need to find the right tools. These tools help automate expense and revenue tracking and build spreadsheets (such as P&L statements) in a few clicks.

Rayl provides SMB owners with tools such as bookkeeping, expense and purchase management, reporting, and more. You can also use Rayl for operations, marketing, sales, CRM, and anything in between. Start budgeting the right way with Rayl today!

Similar posts