Some companies don’t pass the five-year mark because of high costs, poor financial management, and/or inability to adapt to changing customer tastes. One of the reasons this occurs is because they don’t have a budget that keeps them from overspending. Your business budget and how you implement it can make or break your company.
How do you create a business budget that’s effective?
Deduct Fixed Costs
When you create a business budget, you’ll have to subtract your company’s fixed costs. You’ll know what these are based on historical figures you collected over time. These are expenses that your business incurs that don’t change no matter the profit you generate. Examples of fixed costs include employee salaries, debts, rent, taxes, and insurance. These are daily, weekly, monthly, or annually recurring costs. Once you deduct these, you’ll have a clearer idea about the budget you need to establish to keep your business profitable.
Assess Your Revenue
Review the primary sources of income that your business generates. Get data for at least the previous 12 months so that you’ll have a clearer picture of your company’s profitability. Once you get this information, you can start analyzing where you generate revenue. Doing so allows you to determine the amount of cash you have monthly. It also enables you to identify seasonal trends in your sales figures. These insights allow you to create a business budget and save enough money for the lean months of the year.
Establish an Emergency Fund
You should always earmark a contingency fund for whenever your business encounters longer than usual lean months, natural disasters, equipment breakdown, or other uncontrollable events. This is a fund you shouldn’t touch but include whenever you create a business budget. It’s tempting to use this extra cash for variable costs. However, it’s better to set this fund aside so that you can immediately address an emergency.
Deduct Variable Costs
Other than fixed costs, you should also factor in variable expenses when you create a business budget. These costs can change depending on the production and/or output of your company. Deduct variable expenses from your planned budget. Some samples of this expense include hourly wages, raw materials, utilities, subscriptions, and other similar costs. Assess these expenses over at least 12 months so that you can estimate their amount when it’s time to make a budget.
Identify Your Profit
Get the total of your projected costs and revenue. Then deduct your costs from your revenue to get your profit. You either get a positive sum or a negative one. This projection allows you to create a budget which will help you cut costs and find ways to boost profits.
After getting the data and projections you need, start finalizing your business budget. Factor in the variable and fixed costs and the projected profits you can generate. This allows you to allocate the funds for each aspect of your operation.
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