Preparing a small business budget – 7 easy steps to help you plan

You’ve just started out in business, a first time entrepreneur. Maybe you’ve lost your job or given    one up. Whatever the reason, you’re now in business on your own.  Your business goals should    include making some money. Waiting until the end of a year when dealing with an accountant is too   late to see if you’re losing money. You need to plan, or budget from the start to avoid that  daunting   situation. A budget is simply a plan of revenues and costs for the coming year. It will not be the same as what actually happens, but you can adjust it as actual event happen. So where do you start? Below I outline 7 easy steps to help you. You might find these work quite well in a spreadsheet (MS Office, OpenOffice or even GoogleDocs). To keep it simple,  let’s assume all costs are paid as incurred.

Step 1. Decide when the period of the budget. It’s normally a year, and this is broken down by month or quarter.

Step 2. Make a list of all the recurrent costs you know.  Things like rent, purchase of goods for resale, wages and so on.Try to work out the costs according to month or quarter, as decided in step 1.  Some costs may be higher or lower depending on the time of year e.g. heating or air-conditioning.

Step 3. Think about any one off costs you will have. For example, you might buy some new equipment. Add these costs to those in step 2.

Step 4. Now, think about the income of the business. Try to work out by month or quarter what you hope to sell and at what price.

Step 5. Now you have costs and income, so you have a basic budget by month or quarter. Adding all the number up will give you an annual budget. if you’re just starting out in business, you might find that costs exceed income, which is okay in the short term. At this point, you should be able to see how much profit or loss your business might make.

Step 6. As the months past by, compare your budget to the actual income and costs of the business. You might find that you have to revise the budget, which is always a good idea as it gives a better reflection of actual circumstances.

Step 7. Get on with your business, using the revised budgets as a tool to measure your business performance.

Most businesses of course do not pay for items immediately, but often get a credit period from suppliers or spread payments over a number of months or years. This means that a cash budget might need to be prepared also to complement an income and costs budget.  I’ll post something soon on cash budgets.