Simple Steps to Creating a Small Business Budget
A study from a few years ago revealed a shocking fact about small businesses: Most of them don’t bother to develop a working budget. The study, from the marketing research firm Clutch, surveyed 302 people who had owned or managed a small business between one and five years. It showed 61% of them didn’t create a small business budget in 2018.
That revelation explains why, according to the Bureau of Labor Statistics, that 20% of new businesses fail within the first two years, 45% go belly up in the first five years, and 65% can’t make it to 10 years. Over the past five years, close to 750,000 new businesses were started annually. This means approximately 150,000 of those don’t make it past two years. It also demonstrates how important little things like a small business budget can be.
“Having a budget keeps everyone working toward the same goals and helps scale your business,” says Wanda Medina, CEO of Maventri, a Washington D.C.-based accounting, marketing and support firm.
It’s a no-brainer to come up with reasons why small business budgets are a good idea. They start with the age-old axiom: “Failure to plan is planning to fail.”
- Budgets are a cornerstone of a business foundation. It’s almost unfathomable to think that close to a half-million (446,286) businesses open shop each year without a budget or financial plan. Heck, they’re a requirement to qualify for a small business loan.
- They’re a financial roadmap. A small business budget helps you know where your business stands when it opens and what it needs to do to reach its financial goals. The philosophy goes: “You can’t really know where you are going until you know where you have been.” Budgets, especially those made for business plans, give you a starting point and direction on where to go.
- They’re an indicator of success. Budgets provide a baseline from which your business grows. They also show you where you can increase or decrease spending and how much revenue you’re expecting.
“Following a budget not only makes good business, it’s the only way to gauge your success,” notes Charles Owen, chief experience officer at Paladin Data Corporation, a leading technology provider for independent businesses.
The U.S. Small Business Administration says a budget is vital to determining:
- The funds needed for labor and/or materials.
- For a new business, total start-up costs.
- Your operations costs.
- The revenue necessary to support the business.
- A realistic estimate of expected profits.
Here’s a simple plan for preparing the most important document your small business will have.
Get Your Duck$ in a Row
You need to figure out how much money your business will earn. For new businesses, this will require a realistic look into a crystal ball. Earnings estimates, profit-and-loss projections, and sources of other income are all needed to plan for the upcoming year. For already established businesses, these numbers should be readily available. If you operate your business through a retail management platform, these numbers can be easily compiled by reviewing sales transactions and inventory records. Comprehensive platforms integrate with accounting programs such as QuickBooks to handle bookkeeping. If your store doesn’t have a retail platform with a point-of-sale terminal, it’s going to take a lot more work.
Determining your fixed expenses begins to fill out the other side of the profit and loss statement. They include basics like building rental or mortgage payments, internet and web hosting costs, payroll, and ongoing supplies. If possible, it’s best to average out these costs over several months as they can vary depending on a number of seasonal factors.
E$timate the Unknown
Variable costs are obviously variable. Things like utilities, gas and electricity, can fluctuate depending on the season. When business is going well, it often takes more money to make more money. Good times might require additional investments while slow times might require a little belt-tightening.
The pandemic and subsequent restrictions on retail businesses tossed a bushel-full of unexpected costs at most stores. Many invested in new technologies to link online and in-store sales, create curbside pickup or delivery programs, or purchase contactless payment devices. Again, categorizing and calculating these costs can help you budget for the future success of your business.
Plan for $uccess
When you’re starting a business, costs such as equipment and staffing are factored into the plan. Equipment will eventually need to be replaced or, at a minimum, upgraded. Not to mention, staffing will eventually need to be increased as your business demands grow.
Small business budgets are simply a plan for the future. Taking the time to figure out where your business stands each year will show you what you need to do to make it succeed.