How To Make a Budget Plan in 6 Steps
Updated June 24, 2022
Creating a budget plan for your business can impact the overall success of your company by regulating cash flow and helping you anticipate expenses. Whether you are operating a new business or have been running your company for years, putting an effective budget plan in place can support your company’s growth and longevity. In this article, we explore the steps you can take to implement a successful business budget plan as well as tips for maintaining an effective budget.
What is a business budget plan?
A business budget is a financial plan that outlines a company’s income and expenses as well as predicts future expenses and revenue. A budget could be thought of as a monetary action plan that allows business owners to anticipate and properly allocate resources and cash flow. Creating and maintaining a business budget can help keep your company on track to reaching its goals and ensure that business-related expenses are accounted for.
Making a budget plan for your company is important because it can:
Help you make important decisions, such as when to hire new staff or cut expenses
Enable you to seek loans from equity funding
Predict future expenses and enable you to adequately prepare for them
Identify funds leftover that you can reinvest
Keep your company from going into debt
Estimate what your business needs to be profitable or increase overall profitability
Make business operations more efficient and clear-cut
How to make a business budget plan
The following are steps you can take to create an effective budget plan for your business:
Determine your revenue.
Deduct fixed costs.
Identify variable expenses.
Plan for one-off costs.
Calculate your profit and loss.
Outline anticipated future budget influences.
1. Determine your revenue
Determining your business’ revenue is the first step in creating a budget plan. Your company’s revenue is the incoming money you receive every month. Revenue is the money you make before deducting any expenses. You can calculate your monthly revenue by adding up all the income sources you have each month. You should calculate your incoming cash for several months—preferably the last 12 months—to get the most accurate idea of your monthly revenue. Looking at your revenue over an extended period of time can also give you a better understanding of the patterns in your income and help you prepare for seasonal slumps.
2. Deduct fixed costs
After determining your monthly revenue, you should add up all of your monthly fixed costs and subtract them from your revenue total. Your fixed costs are expenses that you must pay each week, month or year to keep your company in business.
Common fixed costs include:
Once you determine your fixed costs, deduct them from your monthly income. For yearly fixed expenses, you can divide them by 12 and include them in your monthly deductions to adequately account for those costs.
3. Identify variable expenses
Next, you should identify any variable expenses that your company may have. Variable expenses are costs that either change every month or are not recurring or necessary to keep your business running. For example, sending an employee to a professional development seminar would be a variable expense because it is not required to keep your company in business (but it still may be something you want to do for your company and employee).
The following are variable expenses you may have:
Updating office furniture or computers
Personal development tools and resources
Credit card fees
Delivery or shipping charges
Your goal should be to reduce variable costs when your income is lower, such as during an off-season. When things pick up again, you can increase your variable expenses as they best benefits your company.
4. Plan for one-off costs
In addition to fixed and variable expenses, you should also try to predict any one-off costs you may have in the future and plan for them in your budget. One-off costs are unexpected expenses that can arise at any time. For example, the refrigerator in your office space could break or the plumbing could fail. These situations are often unplanned but require your immediate attention. The best way to plan for these costs is to create an emergency savings fund that you put money into each month or every other month. By doing so, you can be prepared for one-off costs and prevent having to put your company into financial distress.
5. Calculate your profit and loss
Once you have collected all of the information discussed above, create a profit and loss statement. A profit and loss statement is what you get after totaling your revenue and subtracting all of your expenses from it. If at the end of your statement you have a positive number, you are making a profit each month. However, many small businesses—and especially new businesses—will not make a profit each month. If you are in the negative after totaling up your income and expenses, you can use this information to better plan for your expenses and cut costs where possible.
6. Outline anticipated future budget influences
Using your profit and loss statement, you can put together a budget plan for your future. With the information you have gathered with the profit and loss results, outline a proposed budget that you believe you can successfully follow and that will allow your business to grow financially. While this budget may be tentative, your profit and loss statement should give you a good idea of what to anticipate in the future as well as a better understanding of your overall earning and spending patterns. Knowing your profit and loss patterns can help you predict what to expect in the next year and enable you to plan for slower months.
Tips for creating a successful budget plan for your business
You should be able to create a fairly accurate and efficient budget using the above steps. However, there are additional tips you can implement into your budget planning to ensure you create a successful budget for your business, such as:
Divide the budgeting process
Rather than sitting down and trying to complete the entire budgeting process in one day, consider separating the procedure into smaller tasks that you do over the course of a week or a month. For example, you could set aside an hour each day to review one month out of the past year and make note of your income and expenses for that month. After two weeks, you will have this done for the entire past year. Dividing the budgeting process can prevent you from becoming overwhelmed and make it less likely that you overlook any expenses or revenue.
Adjust your budget for seasonality
Many businesses experience fluctuations in income during certain seasons. For example, an ice cream shop may have much more business during the summer than in the winter. If your company is susceptible to losing or gaining business depending on the season, it’s important to factor this into your overall budget plan to ensure you are financially prepared during the slower months.
Consider using an accountant or accounting software
Investing in either accounting software, a bookkeeper or an accountant can help take the guesswork out of your company’s budget plan. These resources can help you keep better track of your income and expenses, create professional profit and loss statements and make suggestions. A professional is especially helpful, as they can help identify any problem areas and help you manage tax expenses.
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