Find out why your business needs to start budget planning.

Preparing for the future, especially from a financial standpoint, is critical for all businesses. That’s why all businesses need to forecast their revenue and expenses to ensure they remain profitable. The best way for many small business owners to do this is through budget planning. 

With a monthly snapshot of your expected business expenses, you can manage your money and track your spending habits. This allows you to forecast for things like take-home pay, wages, bills, and payments for loans or other debts. It can even help you set up an emergency fund. 

By creating a workable budget, you can track cash on hand, expenses, and the revenue you need to keep your business growing, according to Nick Kolbenschlag, managing partner and co-founder of Crown Wealth Group. 

“When you take the time to put the numbers to paper, you increase your chances of tracking them to ensure your business succeeds, helping you anticipate future needs, spending habits, profits and cash flow,” Kolbenschlag told business.com. “Proper budgeting also allows you to identify problems before they become major issues, giving you the ability to course-correct in real time.” 

Your budget process should include updating your expenses monthly, which allows you to verify that your business is on target to maintain profitability. Here’s everything you need to know about budget planning for your business.

What is budget planning?

Budget planning is the process of creating a plan to spend your money. It allows you to determine in advance whether you will have enough money to do the things you need or would like to do. 

Budgeting helps you save money for the long term or for when your business needs it most. If your accounting software doesn’t have budgeting features, use a budget calculator – a tool meant to help you establish a budget, create a savings plan, and pay down debt. 

“Budget planning involves looking at external (economy, regulations and laws, etc.) and internal factors (staff, revenue, expenses, etc.) and then estimating needs, incorporating unexpected things, developing future goals, and looking at historical information and trends,” said JeFreda Brown, CEO of Xaris Financial Enterprises. 

How do you create a budget for a business?

Budgets indicate how much money is spent on aspects of the business like payroll, advertising, supplies and other necessities. To create a budget, small business owners should look at revenue and expenses for the entire calendar and fiscal year. Look at what you spent the previous year and project if you will spend the same, less or more moving forward. 

The goal of budget planning is to lay out all necessary components and brainstorm your goals, according to Shahid Hanif, founder of Shufti Pro. Hanif named some steps the budgeting process should include: 

  1. Examine your revenue. The first step in any budgeting process is to look backward at your existing business and find all your revenue (income) sources.
  2. Subtract fixed costs. The second step in creating a business budget is to add up all your fixed costs, like rent.
  3. Determine variable costs. Variable costs include the price of labor or raw materials.
  4. Set aside a contingency fund for unexpected costs. These expenses don’t arise only when it’s convenient.
  5. Create a profit and loss statementOnce you’ve collected all the above information, it’s time to put it all together to create your profit and loss statement, or P&L.
  6. Outline your forward-looking business budget. Whether you’re a new business or you’ve been doing this a while, projecting what will happen to your business in the future is educated guesswork. 

It’s best to categorize your budget by fixed expenses, variable expenses and non-necessities. Fixed expenses stay constant, regardless of the number of sales, according to Axel DeAngelis, founder of NameBounce.

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