Apart from everything else, money is what keeps the business running. It is needed in almost all areas in your operation, from sales, marketing, hiring, and production. In the same way that we as individuals create a budget for the money that we have, so as businesses. You need to study how to make use of the money that you have which involves creating a budget.
Let’s now get you started on some steps you can take to make sure that your business runs properly and smoothly.
Step 1: Source of income
You’ll need to figure out where your business source of income will be. As mentioned earlier, in the beginning, you’ll have working capital, as it will be used for your initial expenditures, such as office renovations, payment for the rent, purchases of raw materials to be used in production, etc. But this won’t be enough, for you’ll have to prepare for your regular expenses such as labor, electricity, water, and the like. So, you’ll need to have a regular source of income in preparation for all other expenses in your business.
Step 2 and 3: Identify fixed costs and variable costs
All businesses have regular expenditures identified as fixed costs and variable costs. These are costs that occur on a regular monthly basis.
What are fixed costs? Fixed costs are costs or expenses that are fixed and do not change or are not directly related to the volume of the products or services being produced.
Examples of fixed costs are:
- Office or building rental
- Utility bills such as electricity, water bill, phone bills
Variable costs on the other hand are expenses that change concerning or proportionate to the products and services that are being produced or provided. If for example the product you produce increases then so does your variable cost. In the same way, if it decreases, then so do your variable expenses.
Examples of variable costs are:
- Raw materials for the products being produced, like sugar for bottled juice products or fabric for shirt manufacturing
- Labor expenses or wages
Identifying both costs are key to knowing your budget for the month in order have a smooth cash flow.
Step 4: Forecasting
Over time, as your business grows, you’ll have to gather data about sales and all the expenses related to it. You’ll be able to use this data to identify months or periods where sales are either high or low. In which case, you’d be able to make preparations a year ahead for your business budget. This will also help you with critical decisions that you may have to make in the future, such as, expansion plans due to an increase in demand and if you’re able to afford to purchase a piece of new equipment.
Step 5: Buffer/Allowance
Setting aside a buffer helps you to prepare for some unforeseen or unwanted events that may happen at a certain point in time. Examples of such things are:
- Equipment or building maintenance. If your business is involved in manufacturing, some of your equipment may have faulty defects that cannot be foreseen. Accidents for handling may happen in the future and will require additional repair costs, which when not included in your budget may affect your entire operation.
Step 6: A healthy cash flow
Cash flow means the movement of cash or money in your business. There are two ways it moves: inflows – about all the money you receive or that goes into your business, and outflows – about all the money that is being released or disbursed by your business.
Managing your cash flow is important because it helps keep track of the money you have on hand. Thus, it helps you with disbursement to make sure that you don’t run out of cash.
Step 7: Income statement
The income statement, also known as the profit and loss statement, provides you information about your business performance. It is summing up all your income for the month and deducting it from your total expenses for the month as well. You need to regularly review your income statement to identify the areas you’ll need to improve on.
Following these steps will help you get on the right track in budgeting for your business.
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