Small Business 101: Budgeting
If you are trying to run a small business in Singapore, you’re probably checking your budget to see if it’s sufficient to start. However, it can be challenging, especially when you consider start-up costs and other loans that you may have taken out to start your business. It can also be a challenge if you don’t plan your payments ahead of time.
It doesn’t matter the type of business you're starting up, planning ahead and creating a small business budget is essential to manage your finances. Creating a budget can help you take care of your finances until other payments come through for your business in the form of sales revenue.
Having a budget that is detailed is a necessity for your small business to thrive and become sustainable. Below are ways to create a budget for your small business.
Why is Having a Budget Important?
Before you create a budget for your small business, you should understand what a budget is and why you should have one. A business budget gives an overall view of your business’ finances. It includes information about the business’ state of affairs or, also known as income and expenses, and your long-term financial goals.
A start-up business budget is one of the first things you should tackle for your business because it will play an essential role in making sound financial decisions for the business. Being a financial savvy business owner, you want to ensure that you have a budget in place to help you learn how to grow your revenue and how to cut down on expenditure. It will also help land funding to grow your business in the future.
Now that you know why creating a budget is important, you can continue reading to see the things you should know about budgeting.
- Knowing Your Fixed Costs
A fixed cost also known as overhead expenses are expenses incurred that do not change from month to month. Some examples are rent, payroll, website hosting, and others.
You can use your bank statement to review these expenses to see which expense are constant. Once you have all the fixed costs, you should collate them to identify your end figure.
However, given that you’re just starting your business, you might not have any data to use. You can use your projected costs to have an idea of these monthly expenses.
- Including Variable Costs
Variable costs are expenses incurred by the company that will vary month to month. Some examples of these expenses are usage-based utilities such as electricity bills. In some instances, your variable costs will increase when your business picks up due to factors such as increased material usage and additional labour cost.
However, if your profit is below average, then you should consider cutting out some of these variables until it goes back up. At the end of the month, you should tally all your inconsistent variables and that will give you an idea of how much these expenses will come to at the end of the month.
- Expecting One Time Spending
While most of your business expenses will be regular, you will meet expenses you didn’t plan for. Adding these one-time expenses to your budget will allow you to set aside money to cover these expenses. Examples of these include, costs associated with machinery/equipment upkeep or permits and licenses required.
- Developing a Cash Flow Forecast
The next thing you should know when building your budget is an estimate of how much money your business will bring in monthly and where that revenue will come from. Using your sales figure from your Profit & Loss account is a good place to start, after which you can add in other revenue (if any).The avenues of revenue generation depend on your business model.
For example, for self-employed individuals who practice freelance writing, their primary revenue sources will be from writing projects, writing courses, and consultations with other freelance writers.
However, in the case where an individual is to running a clothing store, his/her monthly revenue will only be from sales made for the month.
So, it is important to ensure you have a list of all revenue that flows through your business. After you tally them to know how much money you the business generates. It may be useful to develop a cash flow forecast to note the cash inflows and cash outflows within the business.
- Putting Everything Together
Now that you’ve put all your income and expenses together, what happens next?
On your business budget, you want to tally all your income and expenses, after which you compare your cash inflow to your cash outflow. This will help to determine your profit margin and could also act as a guide when moving forward, allowing for improvement of your financial planning in the future, such as finding ways to cut variable costs down
Alternatively, after gaining some data on your business costs and sales revenue, it may be beneficial to construct a Break-Even Chart as a visual guide and/or carry out a Break-Even Analysis to calculate your Break-Even Point (BEP). A BEP allows you to identify the point at which total revenue equals total costs or expenses. At this point there is no profit or loss — in other words, you 'break even'. The BEP can be viewed as a minimum benchmark to aim toward to ensure the business expenses do not exceed the profits. The formula to calculate the BEP is as follows:
BEP = Fixed Cost ÷ (Price - Average Variable Costs)
A Small Business Budget Template
A small business budget template can be complex or simple. The important thing is that you should create a template that you will actually use. It is beneficial to create a new budget every year with an update for each quarter to ensure your keeping on track by year-end. It is also vital to keep aside funding for one time spending to ensure there is some flexibility in your budget in the case of unexpected events that require funding on a short notice.
When in Doubt, Reach Out!
As budgeting is a crucial part of running a business, it is important that it is done properly. Sprout offers professional accounting and bookkeeping services at rates you like. Our team of chartered accountants can effectively manage your financial accounts with accuracy, allowing budgeting to be implemented with ease. Any questions? Feel free to contact us with your queries, we’ll respond within 24 hours.