When it comes to business, assumptions and the unknown (or unplanned) can lead you down a scary path.
The last thing you want are things creeping in the dark that can cost you money and reduce your profits at the end of the year … or worse, put you out of business.
Creating a small business budget when you are first starting your LLC (or other business structure) can get you off that scary path and into a place where you know what’s happening with your business.
Let’s break down some important aspects of creating a small business budget so you can have a road map for your business and ensure you are on track with your goals.
1. Estimate Your Revenue
First, how much money you are estimating to bring into the business from your goods or services? As a new business owner, this step can be difficult as you don’t have any previous sales data to work from. Consider using industry averages to provide an estimate for your revenue. Err on the side of caution by using the lower end of the spectrum for your first year.
To make things easier, break your numbers down by month, which can give you projections per quarter and then an annual figure. Take into account that your product or service may have ups and downs based on seasonality. Doing research on your market and industry will help you get a better understanding of this when you’re creating your small business budget.
Note: This section is REVENUE, not profit. Figure out the total sales for your business — do not account for any expenses at this stage.
Speaking of revenue, one of the first things to do when starting your business is to open a business checking account to keep your personal and business finances separate. Opening an account with a trusted bank that caters to the needs of small business owners can be advantageous. Bank of America, for instance, has a great business checking account with many benefits to help small business owners.
2. Identify Fixed Costs
These are any reoccurring (necessary) expenses you have on a weekly, monthly or yearly basis. Fixed costs can include things such as:
- Manufacturing costs
- Production of goods
- Business insurance
- Depreciation of assets
You may have more or less based on your individual small business. The goal is to establish all of these expenses and ensure you subtract them from your estimated revenue you figured out in the first step.
3. Figure Out Your Variable Expenses
These are expenses that change over time or are not essential to the everyday operations of your small business. Some of these expenses may include:
- Office supplies
- Raw materials
In the slower months of your business, you want to keep your variable expenses to a minimum. Figure out which variable expenses you can limit or cut during slow times of the year to make sure you have enough cash flow.
4. Determine One-Off Expenses
In a sense, you could include one-off expenses under variable expenses if you wish. However, it’s nice to separate these items on your small business budget as they are generally a one-time purchase or something only purchased once every few years. These one-off expenses can include:
- Company vehicle
- New equipment
- Upgrading old equipment
- Furniture for the office
- Software purchases
5. Create a P&L Statement
It’s time to put it all together on a Profit and Loss Statement (P&L).
At the top of your P&L, insert all of your profits (income) from your various sources. Tally them up and put the total on your statement. Now you have a visual of what your estimated income or revenue will be for the year.
Below your income, insert all of your expenses. Break them out into categories so you can easily see if expenses for a given category are increasing or decreasing year over year. At the bottom, tally up all of your expenses for a grand total.
The very last piece of your P&L will take place at the bottom of your statement (after total expenses). On the final line of the P&L statement, take the estimated income from the top of your statement and subtract out the total expenses you have listed for a final estimated profit (or potential loss).
Note: Don’t get discouraged if you find the numbers equal a loss for the year. Not all businesses turn a profit their first year in business. Initial expenses to start a business could potentially be greater than the money you bring in for the year. Stay the course and continue to create a small business budget each year. Eventually, if you are trending in the right direction, you will begin to see a profit at the end of the year.
You now have your road map for the year and the ability to look at your small business budget to see if you are aligned with your goals. From what you discover, you can either stay the course or make changes to the direction you are headed.
If you are looking for more help with your business, Incfile has great resources you can utilize — especially when you are a new business owner trying to navigate entrepreneurship.