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How to Create a Budget for your Business

A business budget is based on estimates of future revenue and expenses based on historical data. In short, it’s an important part of any business’s financial health. However, the prospect of creating a budget might seem overwhelming. Many business owners often wonder where to begin and what elements to include.

The steps to implementing an effective budget are straightforward and doable. Having a budget empowers you to set goals and direction for the health of your business. This includes preparing your business for sale, if that’s on your horizon. Here’s what you need to know to get started.

Benefits of Having a Budget for Your Business

Creating a budget for your business may seem like a daunting task, but the dividends from your efforts will be invaluable. Let’s explore the many advantages a well-crafted budget can bring to your business.

Informed Decision-Making. Armed with data, you’ll be empowered to make short- and long-term decisions about your business. Need to hire another full-time employee? Wondering if you can invest more in your advertising campaign this quarter? A budget serves as your guiding compass.

Goal Alignment. Aligning your budget with your business goals is not just strategic; it’s critical. This alignment allows you to establish spending priorities and make necessary adjustments. Also, it provides a tracking mechanism, enabling you to gauge your business’s growth in pursuit of your goals.

Risk Management. A budget acts as a safety net for businesses with fluctuating or seasonal revenue. By setting aside funds during peak months, you can create a buffer to cover expenses during periods of lower sales. This foresight will help you navigate through uncertainties and provide you with peace of mind.

Remember, the budget works for you and not the other way around. It is not meant to be rigid and inflexible. You can adjust your budget anytime to align with business goals, fostering agility to seize potential opportunities.

What You’ll Need to Create Your Budget

To best anticipate your future budgetary revenue and expenses, you should start with historical data. In other words, how much money flowed in and out of your business last month? Last quarter? Last year? The more data you have to work with, the more reliable your new budget will be.

If you’re in the early stages of your business, gathering historical data might be challenging. That’s perfectly normal. Use whatever information is available. Then, supplement it with conservative estimates to build a foundation for your budget.

Here are the three things you’ll need to gather:

  1. Revenue. Start by listing out all the sources of revenue for your company, and how much money each generates. This provides an overview of your income streams.
  2. Fixed Expenses. These are the expenses that stay constant from month to month. Examples include insurance, rent, and employees’ salaries. Recognizing these stable costs is crucial for accurate budget projections.
  3. Variable Expenses. On the other hand, variable expenses fluctuate. Include items such as utilities, office supplies, marketing expenses, and any one-time equipment purchases in this category. Understanding the ebb and flow of variable expenses adds nuance to your budget.

Ultimately, the difference between your total revenue and all expenses is your company’s profit. This fundamental equation forms the core of your budget, providing a clear snapshot of your financial health.

Tips for Creating a Budget that Actually Works

Once your budget is in place, there are a few extra steps you can take to ensure its long-term success.

  • Hire an accountant. If you don’t have an in-house accountant, consider outsourcing one. An accountant can review your budget and help your team implement it in a tool like QuickBooks, if you wish. In addition, they can provide expertise in calculating specific expense line items such as asset depreciation and tax projection.
  • Create an emergency fund. Allocate a percentage of your revenue to build an emergency fund within your budget. This will best position your company to weather unexpected setbacks or seasonal dips.
  • Review your budget. Establish a routine to review your budget. Consider setting up recurring schedule to review your budget monthly, quarterly, and annually. Use this time to compare your actual revenue and expenditures to your budgeted figures. Then, make any adjustments or updates to forecasts.

Budgeting Matters When You’re Ready to Sell

Are you considering selling your business? If so, having a budget in place is a key piece of the puzzle. Prospective buyers will view a comprehensive budget as an indicator that you’ve put solid financial foundations in place. In short, it’s a sign that you’ve taken the right steps as a business owner.

Further, if you are a few months or years from selling, careful budgeting can increase your company’s profitability. Contrary to popular belief, the best time to sell your business is when it holds its maximum value. As a business owner, you want to be in a strong position, where demand for your company is high. A budget not only helps guide you to this goal, but also highlights to prospective buyers the diligent efforts you’ve invested in your business.

Free eBook: Selling with Confidence

Taking steps to make your company healthier, like setting up a good budget, not only keeps it stable but also makes it more attractive when you want to sell it.

Selling your business is one of the most important decisions you’ll make. It can also feel overwhelming and stressful. The good news is that we’re here to help. Get started by downloading our free, step-by-step guide. You can sell your business with confidence.

Download the eBook Right Now

 

Shane Mahmood

Shane is a managing partner at Allegiance Capital, helping entrepreneurs and business owners run, scale, and (when the time’s right) sell their business. Prior to joining ACC, he served in the U.S. Army and now uses that experience to fuel his service to others both in and beyond the Dallas-Fort Worth community.