Did you know that there are more than 30 million businesses in the US alone and just 50% of them survive for more than 5 years? Apart from management or administrative problems, most small businesses fail simply because the owners are unable to calculate their annual budget properly.
The yearly budget is more important than you might think. It helps you have a rough estimation of how much money is available for various transactions and services. Without setting a clear company budget, you’re more likely to overspend and risk going out of business. Keep reading to find out more about how to set an annual budget for your small business!
1. What Is A Business Budget?
In the simplest terms, a budget is a financial plan which involves the income and expenses of a particular company for a certain period of time. Business budgets are usually handled by company owners and his/her managers. A business budget is usually prepared well ahead and it’s tracked for each month of the year.
When setting up a budget, managers strive to keep track of revenues and expenditures. They also set numerical priorities, so that the money is better spent. For example, if a company has excellent products but struggles when it comes to marketing and advertisement, directing a lot of money into making the company more popular should be a top priority.
2. Why Should Business Owners Create an Annual Budget?
As a rule of thumb, whatever gets tracked and measured over a period of time, it can be controlled easier. Business owners and managers should create a yearly budget so that they can keep track of the company’s finances easier. Setting a budget gives you an idea of how much capital you have at your disposal for that particular year.
The budget will take into account the revenues and expenses of your company. Therefore, you have a rough estimate of how much money you will make versus how much money you will spend. The main reason why owners should create an annual budget is to prevent overspending and declaring bankruptcy. If the budget gets really low throughout the year, the company owner can cut expenditures or redirect money from other departments to prevent complete financial failure.
3. How to Prepare A Budget for Your Company?
The process of preparing a budget is quite complex and it differs from company to company. However, there are a few great tips every business owner should follow to come up with a decent annual budget.
For example, the first step would be to gather as much information related to your business as possible. Make sure that you speak with key people from all departments and see what reports they give. Maybe the sales team can give you an accurate prediction of how much money you’ll make the next year, helping you to determine revenues.
At the same time, consult with the manufacturing department and see how much money you should expect to pay for the production of goods, delivery, and storage. Do you need to factor in capital expenses such as acquiring new computers and infrastructure? Write down the possible expenses and keep track of them in your annual budget.
You should also consider other types of expenses that are not directly related to your business. For example, do you need to pay monthly rent? Did you factor in the insurance costs? How about leases, services outsourced, and the maintenance costs of your company vehicles?
Lastly, don’t forget to stay on the safe side and be realistic when calculating a budget. In almost all cases, you’ll have to spend more than you previously planned. Make sure that you create a financial reserve that will only be touched in moments of emergency when your revenues don’t cover the entire costs of your business.
4. What’s the Difference Between A Forecast and a Budget?
You probably might have heard the term “forecasting” when it comes to the finances of a particular company. Well, forecasting is a term usually used in conjunction with an annual budget, but there are key differences between them.
A business budget is a financial plan, a tool used to determine the direction in which a company should go. It involves items such as revenues and expenses, as well as cash flow, company positioning, employee compensation, and more. On the other hand, a forecast is usually limited to the revenue and expenditure details.
The forecast is adjusted on a regular basis, usually once every month or 3-months. It offers the business owner an accurate idea on which direction the company is going. Unlike the annual budget, a forecast is not a plan, but a realistic tool designed to determine the present financial status of a company.
5. Using Sophisticated Online Tools to Keep Track of Budget and Forecasting
Back in the days, accountants and business managers would use a pen and paper to keep track of all the expenses and revenues of a company. Luckily, nowadays there are multiple simple and efficient tools designed to do that. If you want to manage the budget and forecasting of your business easier, you need to try Spotlight Reporting and/or FathomHQ.
These tools don’t only connect to your accounting software, but they also reveal plenty of details that can help you manage the budget of your business easier. Similarly, you can also use Jirav for financial planning and analysis, Xero and FloatApp for your accounting needs, and Quickbooks to easily track income and expenses.
Now You Know the Basics of Preparing an Annual Budget
As you can see, coming up with an annual budget for your small business is not that difficult, if you know a few key aspects. The ideas mentioned above are flexible, so you can tailor them to the specific needs of your particular company.
If you want help with preparing a budget for your business or you need assistance with any other bookkeeping task, make sure that you take advantage of our business solutions. We offer financial solutions to small companies and startups and we’d love to put our expertise to your advantage!