A budget also gives you a long-term outlook on your business.  It provides goals for revenue increases and cost reductions.  It lets you know where you need to make cut backs.  It gives you a plan for hiring new employees.  It takes the overall plan for your business and puts number to it.

What is a Budget?

A budget is simply a written plan outlining the revenue and expenses you expect to incur during the current fiscal year.  It’s typically fairly detailed, yet flexible enough to account for unexpected issues.  It can be used for your own internal operations or it may be required to get a small business loan.

It is a mix of using historical trends to forecast as well as accounting for new marketing efforts or changes in your industry.  It’s an educated guess of what you expect the financials of your business to look like in the short-term.

Most businesses create projections for both their income statement and balance sheet.  Including the balance sheet helps to account for cash balances, asset purchases and the trends in payables and receivables.

How to Set a Baseline Budget

If you already have some operational history, the best place to start is with your historical financials.  Look at how you actually spent money in previous periods.  You should see spending trends.  You may spend more on fuel in the winter.  Payroll costs may be higher in the summer.  Perhaps there’s a certain time of the year that you stock up on raw materials.

Certain costs are probably fixed such as lease payments or insurance premiums.  Others will vary in accordance with the season or your revenue.  For these variable expenses, try to find the driver behind the fluctuations.  The better you can set these variable expenses as a percentage of revenue, the easier it will be to budget for future growth.

At the end of this step, you will have a basic budget to work with.

budget by Backdoor Survival, on Flickr.  This work is licensed under a Creative Commons Attribution-NonCommercial 2.0 Generic License.

Filling Gaps

You may find that your expected expenses will exceed your projected revenue.  It may be a slow period in the industry or you may be gearing up for growth.  It’s not too unusual for there to be a cash shortfall in certain periods.  There are a number of small business lenders that provide short-term loans for these type of situations.  For example, a company like Blue Trust Loans provides easy access to a few thousand dollars in a short period of time.  It’s not unlike using a credit card, except that you get the cash in your bank account.

For larger shortfalls, there are a number of options such as factoring or merchant cash advances that provide larger dollar amounts for longer periods of time.  You can try a bank; however, banks have a much more involved application process.  Factors like LSQ Funding or short-term lenders such as the aforementioned Blue Trust Loans make it easy to get funding quickly.

Even if you don’t have a gap in your projections, you may see an opportunity to purchase materials in bulk.  Perhaps there are a lot of unknowns and you’re not fully confident in your projections.  There are a number of reasons that it can make sense to get a funding facility in place.

Adapting and Adjusting

During the first month after setting a budget, you’ll likely find that your expenses don’t align perfectly with your budget.  That’s not unusual at all.  Budgeting is a process that requires continual adaptation and adjustment.  The point isn’t to project the future of your business to the penny, but to provide a general guideline.

Each month, adjust your budget and forecast as necessary.  The longer you continue with this process, the more accurate it will be.  The more accurate you become, the better you will be able to determine your cash needs and plan accordingly well in advance.

Setting a budget for your business doesn’t have to be overwhelming.  Take it one step at a time.  The benefits are well worth the trouble.