There are so many bases to cover when you build a business. It’s an incredible privilege to experience, but you need to stay on top of marketing, management, administrative duties, website building and business financing.
Maintaining care and control of your business finances is imperative from the very beginning. Below, we’ll discuss a few tips to understand the fundamentals of business budgeting so you can manage your costs wisely.
- Outline Your Income Sources
- Fixed & Variable Costs
- Forecasting Large Single Expenses
- Business Financing & Budgeting: The Results
Why Business Financing & Budgeting is Important
Business financing is the lifeline of your company. Having a keen understanding of your budget will help you outline future goals, help you qualify for business financing or leasing opportunities, and allow you to make practical decisions.
Planning, analyzing and controlling operations usually falls on the responsibility of a Financial Manager. For smaller businesses, this may be the owner/operator.
Outline Income Sources
Outlining how much money you’re bringing in every month is a great place to start. If you use any intuitive accounting software or apps, this area of business financing is quite simple. Note that the total number of income sources you have will depend a lot on your business model. For example, if you run a delivery company, this would include Accounts Receivable for transport. For a small writing company, this could be as simple as the monthly income from client contracts secured.
If you're selling goods, try not to tally just the gross income from the goods sold. It’s important to understand Gross Profit Margin. Expressing this number as a percentage will give you an accurate and realistic idea of what you’re making per unit sold after costs for them are deducted.
Business Financing Fixed & Variable Costs
Once you’ve got your income sorted out, it’s time to understand your costs and expenses. Generally speaking, there are much more expenses to track than income sources. It’s best to group them into fixed and variable costs to illustrate which expenses you may need to monitor more over others.
As implied by the name, fixed costs stay the same from month to month. Good examples of this are rental costs, equipment financing payments, storage costs, certain utilities and payroll.
Due to the economy, fixed costs can still change. Rental prices, utilities, and wages can increase, but these are usually quite predictable increases. They're not as volatile as variable costs, but they are still good to compare year over year.
Variable Costs & Expenses
In business, these costs don’t have a fixed amount. These can vary month to month or even week to week. These costs are influenced a lot by economic conditions and your own decisions. Examples of these include fuel, electricity, shipping, travel, maintenance and commissions.
These costs increase alongside productivity and work. To illustrate, let’s suppose you finance a delivery truck for a moving company. Due to the high demand for summer moving, you have increased business. The more driving you do, the more fuel you burn and the more maintenance your truck needs to prevent breakdowns. Note the financing payments are fixed costs while the fuel and maintenance expenses are variable costs.
Forecast Large One-Time Spends
Some costs don’t fit into either category that occur less often and these are called one-time spends. Despite careful planning, these expenses can occur without much warning. Computers or even integral equipment may seize functioning. Calling sudden repair services or purchasing replacements can be costly upfront.
Try to plan one-time spends ahead of time. If it’s predictable, like a business relocation, make sure to save a safety net of cash for the planned expense. Saving a buffer amount to cover unplanned one-time expenses is a clever business financing strategy as well. Surprises happen, just make sure you’ve budgeted for them.
Business Financing & Budgeting: The Results
After doing the legwork and getting your income and expenses together, now you can compare them. Ensure you separate all of your cash flows into the correct accounts and keep the expense types separate.
Keep in mind your goal: you want to make sure you have a clear picture of your profitability month over month. While compiling your business financing information and you realize you’re not profiting, try focusing your efforts on finding new clients. Conversely, if your income is healthy, you may want to reinvest money into your business or even purchase one of the one-time spends a bit sooner than anticipated.