Budgeting is a tool that small business owners know they have to utilize, but unless they majored in business, no one ever really explained to them how to do it. While one resource certainly cannot replace the breadth of knowledge gained from a small business budgeting course, these tips can help you get started and be well on your way to creating a useable small business budget.
Fixed vs. Variable Cost
The first thing you have to do is figure out your costs. There are two types of costs – fixed and variable. Fixed costs are always there, every month, and they are always the same. They are easy to predict and therefore easy to add to the budget. You know, for the most part, exactly how much money you need to budget for to cover these expenses.
Variable expenses are those expenses that are not always there or change quite a bit from month to month. The best way to handle these is to make an estimate in a best- and worst-case scenario, and then observe them over time to see if you can begin to budget for them more accurately.
Once you have your expenses separated into fixed and variable, you need to add them to your budget at the appropriate amounts.
There is no way to know what earnings will be before they are earned, but there are reasonable ways to make an educated guess. Looking at past history and taking into account current market trends, you can make a guess at what earnings will look like.
On a regular basis, usually monthly, and again as an annual whole, look at your budgeted versus your actual numbers. How do they compare? Were you on the dot? Did you over or under budget in any areas? Do you need to add a budget item? Were you close on your earnings forecast? What caused you to be off in any areas you were off? How can you avoid this in the future?
When evaluating your budget to actual comparisons, make adjustments as needed. Adjustments are usually better suited as a year-end activity, but if you see halfway through your entire year budget in one area is already gone and you haven’t used any in another area, and you know you will not use the full budgeted amount, you can do some tweaking. As a general rule however, is it best to see how it all shakes out in the end.
Budgeting is not an exact science. It is the best plan you can make based on the information you have. That is all that can be done when you get down to it.
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