Is Your First Business Budget a Winner?

Drafting a realistic budget and sticking to it are among the first steps toward success in launching a new business enterprise, large or small.

Your budget, together with your business plan, is the roadmap that you will follow to ensure that your business is headed in the right direction and not spending beyond its ability to pay.

At the outset, it's important to point out that a budget cannot be carved in stone but rather should be a dynamic document that can change in response to the variables that are a part of everyday business life.

A first business budget is particularly tricky because you have no real-time revenue and expense history to use as a basis for your budget assumptions.

What a Budget Covers

In an article for SBA.gov, the website of the U.S. Small Business Administration, marketing communications consultant Caron Beesley says that a business budget, in its simplest form, is "a detailed plan of future receipts and expenditures."

Most importantly, your business's budget is a useful tool for providing control, says Beesley. If revenues fall below the levels projected in your budget, it's a clear signal that you should cut back correspondingly on upcoming expenditures to keep the budget in balance.

While a budget is an essential tool for operating your business, it's also a way to acquaint key personnel with your budgetary goals and spending plans so that they can feel invested in the effort to realize those goals and keep spending in check.

You'll also find that lenders will probably want to look over your budget before deciding whether to approve your request for additional financing.

Budgeting for New Business

Creating a budget for a new business, as previously noted, presents special challenges.

To be able to project your business's likely revenues and even expenditures, you'll first need to do your research by talking to local business owners in the same or a comparable line of business.

Even then, try to be as conservative as possible in your revenue projections, which can always be adjusted upward based on actual performance.

Your business budget should cover 12 to 24 months of operations.

To get started, you might want to download the 12-month budget template offered by SCORE, a nonprofit organization that is dedicated to helping small businesses get off the ground. The template can be edited to allow you to replace existing figures with your own projections.

For each of the 12 months, the template provides space for both budgeted and actual sales, cost of sales, and each category of operating expenses.

SCORE Budget Template

The SCORE template, which is laid out in spreadsheet format, allows you to track your budget projections to see how closely they predict actual revenues and expenses.

All of which brings us to perhaps the most important aspect of budgeting -- regular reviews of the budget to make necessary adjustments if your projections of revenue and/or expenses prove inaccurate.

The top line item in the budget template is your projection of revenue from sales of your company's products and/or services. Subtracted from that is the "cost of sales," which includes the direct costs of producing a product or service for sale.

This category should include what you pay for parts or raw materials needed to produce a product; products purchased for resale; labor costs; shipping costs; and other overhead costs related directly to the production of the product or service being sold. Your sales revenue less the cost of sales yields your company's gross revenue for the month.

Do You Have a Profit or Loss?

Still to be subtracted from gross revenues are your monthly operating expenses, which include money spent for accounting, advertising, salaries and wages, interest expense, printing, insurance, vehicle expenses, taxes, rent, utilities, office expenses, and depreciation.

Whatever's left after you've paid for all these operating expenses represents your business's net profit for the month. If your operating expenses exceed your gross revenue, then the difference between the two is your net loss for the month.

Of the budget's importance in operating a successful business, Brian Tracy summed it pretty well in an article for Entrepreneur:

"The act of budgeting for your business forces you to think through all the important numbers and to develop a picture of what your business is going to look like in three, six, nine and 12 months.

A budget is a powerful business tool that will help you make better decisions. It enables you to develop and maintain a thorough understanding of the internal financial workings of your business."