Examine Your Revenue

If you have never started a business before or if you have but it was more than a decade ago, there are likely a lot of things you need to figure out how to do. A key component to planning and building a successful business is to create a viable budget and be able to stick to it and/or adjust it as you go without causing your business to suffer financial setbacks. There are many different ways to approach planning a budget for a new business. Planning for different kinds of businesses and business platforms, and different sized businesses in different stages of development, will likely need to consider different aspects of financial planning. When business is booming and generating a significant amount of profit, it might not seem important to stick to a budget but having a sound budget to stick to can help to ensure long-term success for your business. The very basics of building a business budget can be broken down into six basic steps that can be tailored to fit your particular business’ needs.

Look backwards at your existing business and tally up all of your income sources. If you are at the very beginning stages of starting your business, realistically figure out where your sources of income will come from and how much income is likely to be generated by them. Add these together to figure out what money comes into your business on a monthly basis. Keep in mind, this is your revenue, not your profit. Your profit is the remainder of your revenue after expenses such as rent, internet service, your and your employees’ salaries, etc., have been paid out. It is important to calculate your monthly income based on 12 months (or as many months as you have data to show for). Doing this can show you how your monthly income changes over time and help you to see seasonal patterns that you can plan ahead for.

Subtract Fixed Costs

To figure out your profit, you need to add up all of your fixed costs and subtract them from your revenue. A fixed cost is a recurring cost that is necessary for the operation of your business. Examples of fixed costs may include:

  • Debt repayment
  • Depreciation of assets
  • Insurance
  • Payroll
  • Rent
  • Taxes

Each business is unique and while your business may have some or all of the above fixed costs, it is highly likely that it has many additional ones. It is important to be aware of and keep track of these.

Variable Expenses

Variable expenses are expenses that change depending on how much you use a service such as utilities, or need to purchase products, such as raw materials or parts to make what you sell. These are all the costs that are necessary to keep your business up and running as well as, expenses that aren’t absolutely necessary but may help to ultimately increase your profit such as education or professional development events. The non necessary expenses are often called discretionary expenses. 

Unexpected Cost Fund

It is important to have a contingency fund for unexpected costs that can be expected to a certain extent, such as equipment or facilities repair. As tempting as it is to spend and/or reinvest any surplus of income, it is a good idea to have access to “just in case money,” especially for when problems occur when your business is going through a dry period. If your business does not have enough cash to put aside, you may want to look into getting pre-approved for a small business loan or have other financial safety nets in place.

Profit & Losses

It is important to keep track of and to calculate your profits and losses. This means adding up all of your income for a month (or other time period) and subtracting all of your expenses for it. The sum of this will indicate whether or not you made a profit, if the number is positive or if the number is negative, it means you’ve suffered a loss for that period.

Outline Your Budget

Once you have compiled all of the above information, you will need to outline a budget for the short and longer terms. Many business owners use programs to help them to do this and/or hire people (or companies) to do this for them.