How to Prepare a Budget for your Business
It is the beginning of the year, and the ideal time to prepare your annual budget. Budgeting is an excellent way to understand your business and set up a structure for overseeing your operations. With a comprehensive budget, you will be able to track your revenue, expenses, and cash flow.
Here are five steps you can follow to create your budget for 2022.
1. Look back at your revenue
Taking a look back helps you set a benchmark for what could come ahead. Review all the sources of revenue for your business each month, as well as the amounts. This will help you understand any seasonal patterns or slumps in revenue. Remember, your revenue consists of your total earnings, and is not your profit which is calculated once you deduct expenses. Use this amount to project/forecast what you could potentially earn in the coming year.
2. Evaluate your fixed costs
Every month, you have recurring costs that may include rent, payroll, tax, phone and some utilities, insurance, and more. Take note of what these costs add up to each month. This is the first deduction that you will make from your total revenue as you prepare your budget.
3. List your variable costs
These are the costs that will change depending on how well your business is doing. In many cases, they are not crucial to your business operations and may also be referred to as discretionary costs. Variable costs include training and development, utilities, office supplies, utilities, and more. When your revenue is low, you can reduce these costs to ensure smoother operations.
3.Predict one-off expenses
Are you seeking to purchase some more equipment? Or perhaps your business is prone to urgent, but unexpected expenses? Make an allowance in your budget for these costs. This will ensure that you have adequate financial resources set aside when necessary, and therefore protect your business from bearing financial burdens.
4.Estimate your net income
Use the information on your revenue and expenses to estimate your net profit. This entails taking your total revenue, and subtracting fixed costs, variable costs, and one-off expenses. With this information as a base, you have room to make adjustments to elevate your overall profit by making informed financial decisions.
Business owners often make the mistake of creating budgets based on inbound projects, or specific clients. Instead of taking this approach, it is more efficient to create an annual budget based on your historical information.
With an annual budget, you have the benefit of predicting your high-income months, as well as your slow months. This enables you to cater for your financial needs throughout the year and stay out of debt.
Create your annual budget with guidance from RCN CPAs & Business Advisors and take full control of your business. Click here to schedule an appointment.
