5 Steps to Create a Business Budget for Small Businesses Owners

By  //  June 21, 2021

Budgeting is a dreaded topic for most business owners, but staying on top of the finances is crucial for a business to succeed. More often than not, small businesses run on a strict budget and that’s why knowing the whereabouts of each penny is important.

As a small business owner, if budgeting seems intimidating, here are five steps to help you:

1. Analyse revenue streams

The first step to understanding the budget is to review your revenue streams. Revenue is what your business is bringing before the expenses are cut. Most businesses have more than one revenue stream. Analyze the channels and their performance and see the revenue you’re generating each month. This also gives you a clear picture of the entire year and helps you identify slumps and hits. 

2. Identify fixed expenditure

Once you know your revenue, you can determine the fixed cost that comes with running the business. This expenditure is essential and includes usual suspects like payroll, rent, tax, and insurance. Some businesses don’t cost much to operate but most successful SMBs will carry a certain amount of fixed cost each month. Study the fixed cost to see if it can be optimized for an improved outcome. 

3. Address the variables

While checking the business cost you’ll notice that not all of it falls under the fixed cost section. Some variables change throughout the year. It can be seasonal marketing campaigns, varying ticket prices, and equipment replacement costs. While employee salaries are part of fixed costs, bonuses are variable costs. If you have a big enough sample size to compare and contrast, you’ll find a clear pattern behind the variables. Be sure to mark them down. 

4. Keep some financial legroom

Disaster strikes when you least expect it. As 2020 has shown us, if you don’t have a contingency fund to fix sudden glitches, your business can go under pretty quickly. That’s why it’s important to keep some financial legroom for one-off costs and emergencies. The amount depends on the profit but companies that are able to maintain a backup fund for all kinds of unforeseeable expenses are more likely to survive the hard times.

5. Document the budget

Once you have all the moving pieces of your budget, bring all of them together. Review the total cost and subtract it from your gross revenue; this is your net profit. Also, make sure to check whether your cash flow is positive or negative. Study the numbers and see if you can cut down an aspect of your business to increase revenue. Based on the monthly and yearly historical data, you can create a budget framework for the future. 

If done right, budgeting can provide wonderful insights. That’s why almost one in four small businesses plan to hire a financial consultant this year.

Hiring a virtual CFO vs an on-site CFO gives small businesses a flexible, cost-effective yet comprehensive financial solution that is tailored to their specific needs. A part of outsourced financial services, virtual CFO coaches businesses on the best ways to manage their finances.