Four steps for creating a budget for your business

From AccountingToday.com — By Justin Hatch — 

Running a profitable business is not an easy task, as evidenced by the high failure rate of new businesses. According to the Bureau of Labor Statistics, 18% of new businesses fail in the first year, while up to 65% fail by their 10th year.

An important factor in building and maintaining a profitable business is using an accurate budget. A budget carries a lot of weight, so building one might seem daunting. This indispensable duty does not have to be intimidating, however, as long as you know where to start and if you approach it the right way.

1. Identify revenue

In order to craft an accurate budget, a company’s revenue streams will need to be identified. Accountants should find all sources of revenue and calculate how much money the business can expect to generate. Revenue sources could include services provided, product sales, subscriptions and fees, as well as other avenues. Some revenue could be one-time income, such as asset sales. Other sources may be ongoing, including rent from property assets or monthly and annual fees paid by clients.

2. Determine expected costs

After calculating the revenue a company is expected to bring in, the costs a company will likely incur should be determined. Costs can also come from a variety of sources, both anticipated and unforeseen. Expenses should be calculated from the following areas:

Fixed costs: Fixed costs are those that do not change. Examples of fixed costs a company might incur include rent for office or manufacturing space, utilities, salaries, or contractual obligations.

Variable costs: Variable costs are those that can change throughout the year as the market fluctuates. These expenses could include fleet management (impacted by fuel and vehicle costs), manufacturing (varying with the cost of goods), labor (hourly, overtime, or commission-based wages), and other factors.

One-time and emergency expenses: Some costs can be difficult to estimate, as they may be one-time expenses or emergency situations. Maintaining office equipment and addressing issues as they arise are costs that could come up every year. Major market changes, economic hurdles, bad weather and pandemics occur less often but can drastically affect a company’s spending. When possible, funding should be set aside to allow for these contingencies.

3. Compare historical data

With these costs and revenue sources in hand, figures should be compared to a company’s past performance. Comparing estimates to historical data will help ensure the budget is accurate and not overly optimistic or pessimistic. Gathering profit and loss data allows accountants to look at how past budgets measured up with the company’s actual needs.

4. Build your budget

Income sources, projected costs and historical data can now be brought together to create an accurate, forward-looking budget. Historical profit and loss data can be used to determine when the company might experience highs and lows in cash flow and how to best take advantage of fluctuations throughout the year. Now, create a budget that gives the company the best information to improve profitability.

While it’s difficult to predict every hurdle and opportunity a company will encounter, creating the most accurate budget possible enables informed decisions. Follow these steps to build the best budget to keep the company financially on track.