Many businesses, regardless of their size, start struggling when it comes to budgeting. This step requires much responsibility and a clear understanding of the company's financial situation. Expense management and planning software aids businesses in this process, but a basic understanding of budgeting practices is still very important. This article explores the most important aspects of business budgeting. Here are the steps that will help you create business budget properly. 

How to Create a Business Budget: 7 Essential Steps

Let's get straight to the practical side. These are the most valuable steps to take while planning your business budget. Regardless of the domain in which you are operating, these decisions and steps might be very beneficial to you.

1. Review your revenue

First, you should analyze your current business and identify all your revenue sources. Review the data over the past period (up to 12 months) to calculate your monthly earnings from different revenue streams. Consider your monthly income fluctuations. Quite often, they are associated with seasonal trends. Be sure to identify these trends if they are relevant. By recognizing these seasonal fluctuations, you will prepare for slower periods much more efficiently. As a result, you will have the opportunity to build an efficient financial buffer. Also, review historical figures and trends to project future revenue. Just remember that revenue is more important for your budgeting than profit. Only revenue is the actual sum of money you have by the end of a particular period. And revenue should be considered while planning your budget for the next period.

2. Compile your historical fixed costs

To accurately forecast future expenses, make sure to compile all your historical fixed costs. These costs remain constant regardless of your business's income. Here you should consider your daily, weekly, and monthly expenses, review invoices and relevant documentation. The aim is to collect all the relevant data and consider it during the budget planning stage. Some examples of fixed costs to consider:

• Rent

• Employee salaries

• Equipment and premise maintenance fees

• Property taxes

• 3d-party service fees

• Insurance

Subtract the compiled fixed costs from your income to understand the resources you have before starting the budget planning stage.

3. Compile your variable expenses

Apart from fixed costs, you should also identify your variable expenses. These are the costs that are more challenging to predict. Unlike fixed costs, these expenses depend on your business's output. Analyze these expenses and their fluctuations over a particular period of time. Use this data to project future variable costs. Be sure to subtract these expenses from your income as well. When it comes to the examples of variable expenses, one can mention:

• Hourly employee wages

• Raw materials

• Utility costs that change based on business activity

• Inventory purchases

• Travel expenses

• Shipping and delivery costs

• Occasional marketing expenses.

Mind that in lean months, it’s advisable to reduce your variable expenses.

4. Run risk assessment and anticipate unpredictable costs

Risk assessment and estimation are essential in budget planning because they help identify additional financial uncertainties. Assess possible risks, such as the threat of a security breach or other emergencies, and estimate their potential impact on your business. Understanding how certain expenses vary allows you to create a more adaptable budget that can respond to market changes. Moreover, recognizing risks enables you to formulate an emergency budget. With such a proactive approach you will be able to respond to the emerging problems much more efficiently. Finally, any risk assessment practices help you prevent situations when you need to rely on an emergency budget. If everything goes well, you can redirect the funds from this budget to other needs.

5. Precisely estimate your profit

Now, it's time to estimate your actual profits considering all the factors mentioned above. Calculate your estimated revenue and expenses for each month, then subtract the expenses from the revenue. The figure you get is your net income, and it is your actual profit. It may indicate a loss, which is a solid argument for you to start planning cost optimization strategies. Also, compare your profits with historical data. This will give you relevant insights into your business dynamics.

6. Establish cost-optimization strategies

Cost-optimization strategies will come in handy in any case. Whether you are facing financial losses or just want to make your business more profitable, there will always be something to optimize. Let's delve into some effective cost-optimization strategies that can be considered during the budgeting stage. First, you should analyze and streamline operational processes, eliminating inefficiencies that lead to unnecessary expenses. You can also try to negotiate better terms with suppliers and vendors. If everything works well, you will reduce costs on materials and services. Also, review existing technology solutions that automate routine tasks. By freeing up resources for more strategic workflows, you can save significant cost. Once you have embraced a cost-optimization strategy, you can expect particular cost savings. You should consider this information while creating a business budget.

7. Come up with the final plan of your business budget

At this point, it's time to set realistic spending and revenue goals for each month, quarter, and year. Set different budgeting categories and monitor each one of them. Be sure to set attainable milestones. If your financial goals don't align with your projections, create a plan that will help you bridge the gap. Over time, consistently compare your actual results to your budget. This will help you understand whether your business is meeting its goals, and make adjustments as needed.

Conclusions

While business budgeting might be a challenging task, it can be effectively settled with a structured approach. Follow the seven steps mentioned in this article to come up with the most relevant budget that will help you meet your business goals. Almost all these steps can be enhanced with efficient financial planning software. You will need to consider your revenue, expenses, actual profits, and cost-optimization strategies. If everything is done properly, you will receive a detailed and diversified budget that can be easily monitored. The value of such a budget for a profitable business is truly challenging to overestimate.