Whether you have just started your business or are years into operating it, budgeting is a useful tool you may use to assist in making sound operating and financial decisions. A budget can also be looked at as the first step in planning out your business’ financial future.
Another benefit budgets have, particularly, as it relates to a new start-up, is that it forces the entrepreneur to “put a number” on their dreams. More specifically, it forces them to detail the true costs and projected revenues of their lofty goals and objectives. A budget in this sense, if done correctly, can make the difference between business success or failure. In this article, you will learn the basic steps to creating a budget for your small business.
Now that you understand the importance of budgeting and how it can help you in establishing and maintaining your business, let us dive into the steps you must take to perform a budget:
Step 1: Forecast Sales
Estimating your sales volume affects most other items in your budget. For instance, knowing your revenue and the various channels you anticipate it coming from (I.e., you have multiple products for sale), will help you determine the costs related to those items you sell.
Step 2: Production Costs
The cost needed to produce your products will be based on the volume of sales you forecasted in Step 1. This step requires you to know what it cost to make a single item. If your product requires the use of multiple ingredients or other products to make it, you should first calculate what each separate item costs that will be combined to make 1 unit of product you are selling. This combined cost of each separate item can then be used to determine your cost per product. It will be helpful to use a spreadsheet for these calculations.
Step 3: Purchase Budget
After calculating steps 1 and 2, you are now capable of estimating the total purchases of inventory, equipment or other items that will be necessary in the production of your product at the volume you plan to sell at.
Step 4: Operating Expenses
This section of the budget will account for the costs involved in performing the steps necessary in making, selling your products and more. For instance, if you will have to hire individuals to assist in producing, packaging or distributing your products, you’ll want to project the cost for this. If you will require a facility, and incur costs to operate within your facility, these costs should be included here. In other words, this section is a total of the costs you will incur to sell your products and manage your business.
Once you have estimated your sales, production costs, purchasing and operating expenses, you will be able to determine your financing needs. For instance, if the amount of your revenue you forecasted in Step 1 is not more than the overall costs and expenses you have estimated in Steps 2-4, you will have a deficit or shortfall of cash needed to meet your objectives. This will require you to either seek financing (I.e. Loans, line of credit, etc.) or seek investments from outside sources.
As you can see, being charged with a budget for your business, whether you’re in the start-up phase or growth phase of business, can help you make more sound decisions as it relates to how you operate and finance your business.
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