What makes a good budget?
Budgets are perfected over time
The key to creating a good budget is to evaluate the previous years’ data and draw realistic projections. The effectiveness of a budget also depends on how well any projected goals have been achieved by your business. This is a skill that you get better at over time because you will understand the insights into your business more as you monitor the numbers.
Include the right information
Every good budget should include seven components:
- Estimated revenue.
This is the amount you expect to make from the sale of goods or services. It’s all of the cash you bring in the door, regardless of what you spent to get there. This is the first line on your budget. It can be based on last year’s numbers or (if you’re a startup), based on industry averages.
- Fixed costs
These are all your regular, consistent costs that don’t change according to how much you make—things like rent, insurance, utilities, bank fees, accounting and legal services, and equipment leasing. Be aware that over time, your fixed costs can change due to inflation, interest rate increases and rent increases.
- Variable costs
These are costs that change according to production or sales volume and are closely related to the “cost of what is sold,” i.e., anything related to the production or purchase of the product or service that your business sells. Variable costs might include raw materials, equipment use, inventory, production costs, packaging, or shipping. Other variable costs can include sales commission, credit card fees, and travel.
The cost of salaries can fall under both fixed and variable costs. For example, your core in-house team is usually associated with fixed costs, while production or manufacturing teams—anything related to the production of goods—are treated as variable costs. Workers that are salaried have fixed costs whereas workers that make their earnings based off of commission or the number of hours worked are variable. Make sure you file your different salary costs in the correct area of your budget.
Lowering your variable costs is one of the most common, effective ways to increase your profit margins and make more money per sale. That’s good news if your business is really starting to pick up, but you’re still finding it difficult to pay the bills.
- One-off costs
One-off costs fall outside the usual work your business does. These are startup costs like moving offices, equipment, furniture, and software, as well as other costs related to launch and certain investments. It’s important to track these costs as although they do not appear frequently, they can skew the numbers in the short term. In the long term they could account for unmanaged losses.
- Cash flow.
Cash flow is all money traveling into and out of a business. You have positive cash flow if there is more money coming into your business over a set period of time than going out. This is most easily calculated by subtracting the amount of money available at the beginning of a set period of time and at the end.
Since cash flow is the oxygen of every business, make sure you monitor this weekly, or at least monthly. You could be raking it in and still not have enough money on hand to pay your suppliers, or other costs that you are due to pay.
- Profit
Profit is what you take home after deducting your expenses from your revenue. Growing profits mean a growing business. You’ll need to estimate how much profit you plan to make based on your projected revenue, expenses, and cost of goods sold. If the difference between revenue and expenses (aka “profit margins”) aren’t where you’d like them to be, you need to rethink the cost of goods sold and consider increasing your prices or finding ways to lower your expenses.
If you think you can’t squeeze any more profit margin out of your business, you can also consider boosting the advertising and marketing spend in your budget to increase total sales.
- Budget Calculator
A budget calculator can help you see exactly where you stand when it comes to your business budget planning. It might sound obvious, but getting all the numbers in your budget in one easy-to-read summary is really helpful. It gives you a quick view of how your business is performing.
Updated regularly
Budgets need to be updated regularly to ensure that they are realistic, accurate, and on track with any changing circumstances. You need to have eyes on the numbers to prevent too much money being spent or allocated to the wrong area of the business without realizing. It can be harder to back track from a worse position, and it’s much easier and better to stay ahead of the game.
Easy to edit
The best budgets are simple and flexible. If circumstances change (as they do), your budget can flex to give you a clear picture of where you stand at all times. It’s a good idea to make your budget using a template online as you can easily set up to automatically calculate your profit/loss. You’re able to change the numbers around as you go so it’s easy and quick to see the new result for your budget.