Technology & Innovation
5 Steps to Create a Small Business Budget

5 Steps to Create a Small Business Budget

Alex Roha

25 Jul 2022
7 minute read
two people sitting at a table going over small business budgets

Small business owners lifting a new business off the ground can feel the exhilaration of a great new endeavor. But while riding the highs of opportunity, strategically controlling costs must remain top of mind.

Historically, small business owners have good odds in the initial launch of a new company. Roughly 80% of small businesses with employees will survive their first year, according to data from Fundera. However, that percentage declines to 50% by the fifth year. 

Failing to address the needs of a budding company with a well-laid-out plan before operations begin can create greater challenges down the road. And for 2022, that plan is especially critical as inflation is growing faster than the historical average.

Understanding how to manage a small business budget can seem intimidating. Many resources are available, but which is the right fit? Below is an introduction to handling a budget and setting a small business up for success. 

Why small businesses need a business budget

When just starting, a small business owner will likely begin by making educated guesses with initial data on the future of a company’s finances. Examining the startup costs, what is expected three months down the line, what next year will look like, and where costs can be cut, can help a small business owner accumulate data for wiser financial decisions for the journey ahead. A new small business owner may ask: 

  • Where does this financial data come from? 
  • Is there technology to help? 
  • What will make a difference come tax season?

Suppose a company’s offerings are seasonal, like lawn care in the summer versus the winter or wedding planning for the spring and fall. In that case, businesses can prepare to minimize costs with a better vision of incoming upswings and downturns. However, there are also times when finances must be balanced at a moment’s notice, such as when a viral social post propels profits.

In other words, there is no one true path to a perfect budget. Factors from all directions can change a company’s trajectory. But a surefire financial plan can create a stable safety net as the economy and trends fluctuate.

There will be math and pure gut reactions, but a little bit of both can keep everything running smoothly. 

How to create a small business budget

When getting a small business budget started, there should be several goals in mind:

  • Make the accounting cycle efficient
  • Forecast slow months to avoid debt
  • Identify leftover funds for reinvestments
  • Estimate profitability
  • Efficiently manage cost control

The longer a small business has been operating, the easier it will be to collect and predict accurate data. However, beginning with a solid budget template or creating one from scratch that meets a small business's needs will also work. So, where to start?

1. Examine revenue

Small business owners must first understand how much money they have before determining how much they can spend later on. Start by analyzing all the previous revenue acquired and the various sources this revenue comes from. 

This will be the initial reference point for setting realistic goals for the company and its employees. Revenue is all the money a business acquires before expenses are deducted. Profit is the remaining money after deducting expenses.

Repeat this process for several months to understand the monthly income a small business may incur. Most companies break this revenue data down by months, quarters, and years to compare over time for seasonality. If a company can more accurately predict dips, it can prepare a better cushion to fall back on.

2. Analyze small business costs

Business owners should review the operating costs required to keep a small business moving before setting out the full budget. If the budget doesn’t account for the everyday spend of running a business, it could jeopardize goals when unforeseen costs occur.

Small business leaders should break down these costs into fixed, variable, one-time, and unexpected. The ones that are the easiest to consider in the budget initially are fixed and variable.

Fixed Costs

Fixed costs are those that a business incurs regularly. These costs could be recurring daily, weekly, monthly, and sometimes yearly. So the data may be spread out over time, but it is crucial for accurate reporting.

Examples of fixed costs for a small business might include:

  • Supplies
  • Rent
  • Taxes
  • Insurances
  • Software subscriptions
  • Payroll

These costs will be unique to each business and could vary from these examples. After identifying these costs, subtract them from a small business's income since they are recurring bills. Once done, move on to variable expenses.

Variable Costs

While defining fixed costs, small business owners will notice some costs that occur depending on how much of a service or product is used. These aren’t necessary for keeping the business afloat but can benefit long-term business goals. Examples of these variable expenses may be:

  • Replacing outdated equipment
  • Business education for employees
  • Owner’s salary
  • Marketing
  • Utilities
  • Commissions

For companies that expect seasonal dips, variable costs are the ones that are the easiest to cut when it comes to discretionary spending. In peak seasons when business is roaring, throwing some extra money into variable costs can create future benefits that may even help in the slower months.

3. Prepare for unexpected costs

When running a business, expect the unexpected. One-time costs are bound to occur, and they often come at the worst possible time. A sales rep missing a flight and having to book another or a projector breaking before a major presentation is a part of life.

Rather than waiting for something to go sideways and then reacting, set aside extra cash for contingencies within the budget. Using this surplus on other business costs will be tempting, but this money is an emergency fund.

4. Define profit and losses

Now it's time for calculations. Start by adding up all a business's costs and expenses and subtracting that from the business’s income. If the number is positive, the company is making a profit. If the number is negative, it is a loss.

If it’s a loss, that’s okay! In the first year of business, most businesses don’t make any money—many require roughly 18 to 24 months to reach profitability, according to Forbes. Businesses may learn the most from these losses that there is likely room to cut unnecessary spending. 

Start back at the beginning of this guide and decide if there are expenses worth eliminating that won’t deter business operations. The goal is to make those losses smaller and smaller over time. It won’t happen overnight, but a realistic budget will always help.

5. Begin to set up forward-looking goals

Congratulations, the process is nearing the end. Next, business owners should reference the above profits and losses to understand seasonalities, which investments are worth repeating, and what to cut in future ventures.

Owners are looking for efficient ways to explain these fluctuations and changes that businesses will go through. This process doesn’t need to occur all in one step, at one time. This data arrives at different intervals. Set recurring goals and check-ins so reviewing money spent is a constant exercise, not a sporadic process.

For those who have the means, hiring an accountant to manage this budget is always an option to help course correct and manage finances.

Automated expense management software like Navan can also keep checks and balances running smoothly in the background. So small business owners can focus more on running their business and less on making sure finances are used correctly.

The role of accounting software for small businesses

Small business budgeting can seem like a huge task, so assistance is always welcome. By implementing expense management software, small businesses can analyze costs, monitor employee spending, and see real-time transactions that make a budget more feasible.

A perfect budget evaluates previous years' data and draws realistic projections. Navan expense management software and corporate cards equip finance teams with real-time data to drive smarter decisions on cost savings and efficiencies. With the help of interactive dashboards, spend can be sliced and diced with unprecedented granularity. 

By seamlessly integrating with enterprise resource planning software (ERPs), Navan helps create a single source of truth for all business spend. Proactive policies are also programmatically built into smart cards to automate expense management from swipe to reconciliation.

The passion behind small businesses is key to success. Rather than spending time on attempting to manage finances, Navan gives small business owners time back to spend on their passions, on the ground, and in front of customers.

The goals are set. Now it's time to let Navan Expense help small businesses achieve them. Ready to start using Navan today? Get up and running in 5 minutes.

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