What is a budget? A budget is simply a tool that tracks expenditures and helps plan how money will be used. A well-planned budget takes the guesswork out of both day to day bills and long-term goals.

Realize that a budget will not solve any financial problems. It is simply a tool to help correct problem areas. Once a problem area is found then necessary changes can be made.

Do research. If you are in the process of starting a business and don’t have a previous budget to use, research typical costs and sales trends associated with firms in your sector and determine averages.

Keep it simple. There is no need to list every expense in great detail. For example, combine your office supplies into one category.

  • Calculate net cash flow: This is the most critical part of a budget. Calculate the funds the company brings in. Gather every financial statement possible including bank statements, investment accounts, all utility bills, and all sources of income and expenses. The goal here is to create a monthly average, so the more information you can find the better.
  • Record all sources of income: Hopefully, your business is already set up in electronic software such as QuickBooks. If so, this part will be fairly easy. Compile specific reports to get all of the information needed.
  • Review bank and credit card statements: These are all recurring expenses that have fixed amounts. Review the last 3 months in order to obtain a good feel for the pattern of recurring expenses.
  • Create a list of monthly expenses: Write down a list of all the expected expenses you plan on incurring over the course of a month. Then break the expenses into two categories: Fixed and Variable. Fixed expenses are those that stay relatively the same each month and are a required part of a business. Variable expenses are the type that change from month to month.
  • Analyze results: If you have net cash remaining at the end of the month, your financial business lifestyle may be healthy. Total monthly income and monthly expenses. If it shows a higher expense column this means some changes will have to be made.
  • Make adjustments to expenses: Knowing that you have accurately identified and listed all expenses, the goal would be to have the income and expense columns equal. Therefore, all of the income is accounted for and budgeted for a specific expense.

If you are in a situation where expenses are higher than income, look at your variable expenses to find areas to cut.

Always review a budget monthly. It is important to review a budget on a regular basis to make sure you are staying on track. After the 2nd or 3rd month compare the actual expenses versus what was created in the budget. This will show where you did well and where you may need to improve.

Why is a budget important?
Referring to a budget at regular intervals is a very valuable learning tool. Forecasts can be compared with actual numbers. It is important to revisit the budget on a periodic basis to evaluate these numbers and see whether planned figures diverge from the actual. Try to make this a regular part of running your business.

Be flexible. A budget, although a useful tool for remaining disciplined, is not set in stone. A budget should not be used as an absolute ceiling as to how much can be spent but a tool for making sure business goals are being met and all spending is justified.

In the beginning, planning the small business budget may seem like an overwhelming task. However, over time you will begin to see how this simple planning tool actually takes much of the stressful guesswork out of running a business and makes the operations function smoothly.