How Do You Calculate A Small Business Budget?
A successful business runs based on a smart, and strategic, budget.
Considering that, how do you calculate a small business budget? More importantly, how do you make it work for you and the goals of your business. All of these things are crucial to help set you up for success, but many businesses forget to do them.
In this article, we will cover:
- The importance of building a budget
- How to build a calculate a budget
- Building smarter budgets with Board
How A Budget Can Change Your Business
The benefits of building a budget should be clear. From the very top, it helps set a strategic direction for your company moving forward. Whether you are just starting out, are in a period of growth mode, or are scaling, a budget can help direct that movement.
At the same time, a strong budget will allow you to allocate the right resources into smarter investments and purchases. It can also monitor the progress and development of your business, while accomplishing your objectives.
It may also help you identify any issues in the future, as well as motivate employees who know the direction of the business and how you intend to grow. In general, it is about adding clarity – to your business, your products, and your consumers.
Lastly, a budget can help assess the creditworthiness of your business. Potential lenders will often request documents like your budget (along with other financial statements). Therefore, having a proper and well-thought-out budget is essential.
If you can back up your business with real, hard data, it will make it much easier for lenders and banks to give you the money you need to grow.
So, How Do You Start Calculating?
It all starts with the numbers, and there are essentially two methods to calculate a budget.
Let’s break it down like this:
- Bottom-Up Budgeting – This means beginning with your fixed costs, then your variable costs, and reconciling it with your revenue (how much you intend on making).
- Top-Down Budgeting – Essentially the opposite, you begin with your revenue forecast, followed by variable costs, and then adding your fixed costs.
Basically, it’s all about three things:
- Fixed Costs
- Variable Costs
- Projected Revenue
If one of these three pieces are missing, then your budget is not going to be calculated properly. You’re going to be missing a key piece of the puzzle, and your budget will likely reflect that – it will not feel whole.
Overall, it is essential to be realistic. If you are building a budget, you need to factor in a projected month-to-month cash position. Not only is this smart for the outlook of your business, but it will help you provide monthly updates to see if you are meeting your goals.
That’s why you cannot overestimate your sales or underestimate the costs of building out your products or services. If you do this, you will immediately start to experience cash flow problems when that money doesn’t come in (or when it’s rushing out).
What you need to do is rely on solid data to help drive your decisions and the way you budget your business. The art of calculating a budget is easy, but the trick is calculating it effectively.
Step-By-Step: Calculating Your Budget
Here are some additional tips to ensure that your budget meets your needs:
- Make It Accessible – Whether on a spreadsheet or your phone, you are going to be updating your budget periodically. Ensure you have easy access to it, and that you can make changes and edits as you see fit.
- Break It Down – A budget is best understood when expressed in terms of months. It allows for proper benchmarking, too. Start your budget at the beginning of the year, but break it down to get a full picture of your financial calendar.
- Always Compare – Because your budget will feature projections, you should always compare it against what actually happened. Not only will this make your next budget even more accurate, it may also guide key decision making along the way.
- Keep Operating – Your operating expenses are important for tax purposes, which is why it’s important to break them out as part of your budget.
Building Budgets with Board
Our team formulated Board with the objective of helping small business get better with their finances. Helping them understand their options, own their solutions, and grow their business on their own terms.
A key part of that is Board’s budgeting feature.
Using Board’s mobile-first platform, you can ensure you know both the top-level indicators, as well as a deep dive into the numbers that make up your business. It’s a style of reporting, especially for your budget, that can result in accurate numbers (not arbitrary ones).
Board also provides forecasting tools to ensure that your budgets are in line with your goals, and with the reality of your business. It allows you to build for the future, and to ensure your budgets are both strategic and accurate.
The Solution You Need: Board for Small Businesses
Interested in learning how to budget for your small business? Want to be able to deal with your finances on your own terms? It’s easy to do, but it starts with Board.
Developed for business owners, by business owners, we created it specifically to help you feel more confident in how you run your business.
No second guessing, no inaccurate results, just a seamless, solution-oriented interface to help you build your budgets and your business.