Operating a small business is a quite challenging venture. Even if you don’t need to manage large amounts of money, you still need to manage your money effectively in order to make sure your venture remains in business and is profitable.
Developing a complete budget for a small business, although it may not be as painful as it would be for an organization, it requires good planning.
Besides, it is a detailed process that, if performed correctly, it can provide you a stable basis to start from when considering successful business operations.
With a business budget, you will be able to track common business expenses and operating costs.
To achieve that, you need to take five necessary steps, which involve developing: a sales budget to project your sales estimates; a production budget to estimate your production costs; an operating expenses budget to project your business expenses; a budgeted income statement to compare your operating costs to your estimated income; and a cash budget to calculate if you make a profit or loss.
Here are the steps you need to take:
a) Developing a sales budget
The sales budget is extremely important because it is the first step in developing your budget for your business.
If you overestimate your sales, it means you will end up with a huge inventory for which you would have spent a lot of money.
From an operational perspective, holding too much inventory creates problems in selling your products in a timely manner. You may also face problems with your inventory going obsolete and losing money from having to dump it.
From a financial perspective, holding too much inventory indicates a low or a zero return rate of return. It also means lower liquidity because you cannot sell more products in a given period of time to turn your inventory into cash and depreciate the money you have given to purchase it.
If you underestimate your sales, you will probably be unable to deliver your product and meet your customer needs.
So, in both cases, a wrong estimate in projected sales will cause your business to suffer.
b) Developing a production budget
A production budget will help you estimate the cost of producing your products including the cost of raw materials, tools, and labor.
Inaccurate estimate of production costs leads to losing money. If you overestimate your production costs, you will produce expensive products and you will charge your customers more.
This will lead your customers to leave your business, sooner or later.
On the other hand, if you underestimate your production costs, you will eventually undercharge your customers thus losing money from selling your products lower than their actual price.
c) Developing an operating expenses budget
The operating expenses budget is typically included in the production budget as it includes regular business expenses.
These are indirect costs such as facilities expenses, furniture, building maintenance, vehicles, rent or mortgage expenses, utilities, insurance, salaries, advertising, accounting, and legal expenses.
An operating expenses budget may also include costs for equipment such as machinery, supplies, and maintenance.
Usually, the operating expenses budget is divided into several areas depending on the subject such as human resources, administration, research, and advertising.
d) Developing a budgeted income statement
After having prepared the sales, production and operating expenses budgets, you need to estimate your income so that you make sure you don’t spend more than what you earn.
This is the step where you need to be absolutely honest with your income projections, which means not too optimistic, neither too pessimistic.
Realism is the key to develop a realistic income statement that will help you prioritize your needs in case of unforeseen expenses.
The point is not exceeding your budget at any point and to remain within your budget limits without needing to spend more than what you actually make.
e) Developing a cash budget
A cash budget is developed to project the cash required for unanticipated needs.
This simply means that you need to break even and make a profit for your business so that you have cash available at any given moment to take care of your business.
Besides, by having sufficient cash on hand, you always have more alternatives than risking losing your customers to a competitive business.
In conclusion, developing a complete budget for small budgeting is required to make sure you have enough money to run your business.
It is actually the best way to determine your resources and get your products to your customers effectively and in a timely manner while ensuring a profit for your business.
All you have to do is follow the above-mentioned steps carefully and be honest to yourself. Only then you will be able to develop a realistic budget that will ensure profitable operations.