Start with your average revenue and expenses to create your small business budget
A small business budget can be the key to financial management. If you have been in business for a while, determine your average monthly expenses and revenue by category based on your data. Use your accounting program to show revenue and expenses for recent years and divide by 12 to get your monthly averages. Once you have these figures, you will have a clear picture of what you can spend each month. If you feel you have been spending too much in certain areas, there are plenty of ways to cut expenses.
If you are new in business, you will need to create estimates for your revenues and expenses each month. This can be challenging for creating a business budget if you don’t have the track record to base it on.
Break your expenses down into fixed and variable expenses when creating a business budget. Fixed expenses occur regularly and don’t usually change from month to month. Rent, for example, is a fixed expense.
Variable expenses are those that change. If you run a retail gift business, for example, you will probably have large expenses in the months before the holiday shopping season as you boost your stock. Another example is utilities. Depending on where you live, you will spend more on utilities in the hottest and coldest months of the year as you need to spend more on air conditioning and heating. You will need to keep variables like this in mind when creating a business budget.
Get data on your industry and see how you compare
Your historical data is a good place to begin but it also helps to see how you compare with similar businesses. Income and expense data are available for a wide range of industries, so you can see where you stand against industry averages when creating your business budget. Some industry associations provide this data for free to members and for a fee if you are not a member. The Australian Taxation Office (ATO) provides industry benchmarks for figures as a percentage of turnover, such as average cost of sales/turnover, labour expense/turnover and rent/turnover.
Using information from the ATO, you can see how you compare in spending categories. For example, rent for bakeries and hot bread shops in Australia ranges between 12% and 18% as a percentage of turnover. If you run a bakery and your rent/turnover is 30%, you will want to find a way to change this – either by increasing your revenue, negotiating cheaper rent or moving to another location.
Think about large purchases when creating your business budget
There will always be major purchases that come up in your business. For example, if you use a laptop for business, you will probably want to replace it at least every 3 to 4 years. If you put this type of expense in your business budget, it won’t break the bank when it comes up.
Putting it all together in your small business budget
When you have a clear picture on what you have been bringing in to the business and spending each month (or plan to if you are starting a new business), you can start creating your budget. Your accounting software should include a budget feature to simplify this process. If not, you can set up your business budget in Excel.
Your business is dynamic, so your revenue and expenses will change over time. Remember to re-evaluate your numbers and update your business budget from time to time.
Here’s a list of common income and expense items to help you get started on your business budget:
- Product sales
- Service sales
- Investment income
- Accounting services
- Depreciation and amortization
- Government and bank fees
- Interest expense
- Legal services
- Mobile phone
- Website hosting
- Contractor wages
- Office supplies
- Other marketing costs
- Postage and shipping
- Printing services
- Production supplies
- Raw materials
- Travel and events