Opening a business is the American dream, but without knowing how to make a budget plan, your business may never take off. You have a big idea and just need investors, or you already have a business, and you want to stay in the black. Either way, you need to learn how to make a budget plan.
A budget plan is a snapshot look at your business in its current situation, but it’s also something to keep you on target so that you can achieve your future goals. A budget shows you where you are wasting money. And it can show you where you might be able to invest more too.
Without a budget, owning a small business is like driving with no headlights on a strange highway. You might make it out alive, but by shining a light on your business expenses and revenue, you have a greater chance of succeeding and are more attractive to investors.
Your first budget should reflect your total start-up costs, your expenses, and your revenue. If there isn’t room in your budget to purchase necessary equipment or hire critical staff, your budget can show you where you can afford to cut back. For example, can you let go of a leased fleet car or outsource some marketing?
How to Make a Budget Plan
In this post, we’ll teach you how to make budget planning easy, or at least easier.
How to Estimate Costs and Total Expenses
If you’re new to business, estimating your costs and expenses should be your first step in how to make a budget plan. Before doing anything else, you should determine both fixed and variable costs. Fixed costs are those that don’t change from month to month. Variable costs do. For example:
- Rent or mortgage
- Phone bills
- Utility bills
- Legal fees
- Marketing and advertising
- Accounting and bookkeeping
Fixed costs are counted as operating expenses and are subtracted from the top from revenues. Note that nearly every business owner underestimates marketing and advertising, as well as legal fees. Entrepreneur Magazine recommends you double your projected marketing costs and triple your projected legal costs, especially in your first year. After that, you will have a more realistic idea of what it takes to run your business.
Variable costs are the costs that change from month to month. Generally, those include the costs to make your product. For example, if you run a bakery, the price of flour, eggs, and chocolate can change dramatically, depending on market forces. If you rely on imports, political winds can influence costs, as can economic instability in the country of origin. Variable costs are subtracted from revenue to determine gross profit.
How to Estimate Projected Revenue
If you’re new in business, you’ll have to do a little detective work to determine projected revenue. You should talk to some competitors, or if you are coming from the same industry, take an educated guess. Ideally, you should have projected revenues in mind before even applying for your business license.
Naturally, if you are new to business, you want your first year to be a huge success. It might be, but if you are like most small businesses, know that you might take a loss in your first year or two. Entrepreneur Magazine recommends that you start off with two revenue projections. One should be aggressive — a goal — and the other conservative. Reality will likely be somewhere in the middle. Factor in:
- Price point of your product(s)
- How it’s marketed multiplied by expected revenue from each
- Number of salespeople multiplied by estimated annual sales
- Anticipated new products
How to Determine Gross Profits
The simple answer for how to determine gross profits is to subtract the cost of goods sold from your total sales. Like everything else in business, though, the simple answer leaves a lot out. To determine your gross profits, calculate:
(Sales – fixed costs) – (Cost of goods sold + variable costs) = gross profits.
For example, if you sold $2 million in your first year, subtract rent, salaries, utilities, etc., which totals $200.000. Then, subtract the cost of goods to you ($800,000), including variable costs ($200,000).
($2 million – $200,000) – ($800,000 + $200,000) = $800,000 in gross profits.
How to Calculate Earnings after Tax
To calculate earnings after taxes:
- Calculate your business’ total revenues for the period (usually a year or a quarter)
- Subtract the cost of goods sold (this includes the money you pay your vendors for materials and their labor, i.e., variable expenses)
- Deduct your fixed expenses (rent, salaries, utilities, etc.)
- Subtract the taxes you paid (or subtract estimated taxes)
The total is your net, after-tax earnings. You will use this figure to calculate next year’s budget.
Best Keep Track of Expenses Software
The perennial favorite expense tracking software is Quickbooks. Depending on the size of your business, Quickbooks can run you between around $200 to almost $1,000 per year. Quickbooks does payroll, keeps track of inventory, manages sales, and of course, manages expenses and revenues. You can download your bank data in Quickbooks, saving you a lot of time on transferring information from spreadsheets.
Sage accounting software is another business favorite. For between $200 – $600, Sage Software covers all your financials, including inventory and expense tracking, It can even write your budget.
There are several other options, one of which is sure to suit your business needs.
How to Keep an Expense Ledger
When you run a business, it’s critical that you keep immaculate expense records. Otherwise, you’ll over-calculate profits, and you’ll perhaps pay too much in taxes. You can download a simple expense ledger online; you can buy one from any office supply store, or, if like most businesses, you use accounting software, you can track your expenses there.
To track your expenses, you and your employees must keep all business-related receipts and track miles driven for work. It’s best to log expenses daily, whether in a paper journal or in your accounting software.
You’ll need to set up five columns: Date, account, description, reference number, debit, and credit. Here’s a sample you can purchase from Amazon.
It’s important when learning how to make a budget plan that you stay on top of your receipts. Record every expense and every bit of revenue, every day if you can, but never less than once a week. Don’t ever guess at the dates. They are critical.
Each transaction will fall into one of six accounts:
- Cash: Cash refers to all the money you could, in theory, spend right now. That includes cash, but it also includes checks and credit card transactions
- Accounts Receivable: Accounts receivable is the money that is owed to your business
- Accounts Payable: Accounts payable is the money that your business owes
- General Journal: General journal entries are for everything that doesn’t have a home, like charge-offs
- Sales: Sales are the revenue from what you sell
- Equipment, Salaries, Rent: This is where you track your fixed costs
What to do with receipts
It’s imperative that you keep all business receipts. Tell your employees that without receipts, they will not be reimbursed for business expenses. Fortunately, the IRS accepts scanned receipts, and most accounting software lets you scan.
But despite that, most accountants recommend that you keep receipts as backup. Keep them filed safely, by date, and by type of expense.
Tracking revenue and expenses is perhaps the least interesting part of running a business, but without it, it would be nearly impossible to stay in business. A tidy and accurate budget can help attract investors and make you more likely to get bank loans when needed. It also paints a picture of your business’ health. Learn how to make a budget plan to help ensure a profitable business.