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Creating your business budget is crucial to your company’s success. A well-thought-out budget helps you monitor your cash flow, allocate your resources wisely and make informed business decisions.
But if you’re like most entrepreneurs, you probably find financial management challenging. Your time is limited, and you may not have any formal financial training, which makes tasks like budgeting more difficult.
There may be a slight learning curve in the beginning, but setting a budget isn’t as difficult as you might imagine. Let’s look at six steps you can take to set your best budget in 2025.
Related: You Won’t Have a Strong Budget Until You Follow These 5 Tips
1. Gather your financial data
The first step is to gather your company’s financial data from the previous months or years, depending on how long you’ve been in business. You’ll want to include previous income statements, balance sheets and cash flow statements.
Reviewing previous financial data will help you identify trends in your business, like sales patterns or expense trends. For example, when reviewing expense reports, you may notice that inventory costs have gradually increased over time, lowering your margins.
You can use this information to renegotiate supplier contracts or discontinue certain products that aren’t selling as well. But without looking at the data, it’s almost impossible to make informed decisions about your business. You can also use your financial data to make revenue projections for the upcoming year.
2. Set financial goals
Once you understand where your business is currently at, you’ll outline your business goals for the year. Financial goals provide a roadmap your company can follow and ensure your business decisions align with your goals.
Take some time to identify both short-term and long-term business goals. Short-term goals could include improving cash flow, increasing sales by a certain percentage or reducing costs. Long-term goals could include things like entering a new market or expanding your product line.
Make sure your goals are specific and measurable so you can track your progress. This will also make it easier for you to develop a plan with specific steps and timelines you need to meet.
3. Project your income
Next, you need to project your business’s income for the coming year. Look at your gross revenue over the last year and divide it by 12 — this will give you your average monthly income. Make note of any seasonal changes, like a temporary slump in sales after the holidays. You can use this data to make projections for the coming year.
Related: 50 Budgeting Tips for Small Business Owners
4. Estimate your expenses
Once you have your revenue projections, you want to account for any fixed or variable costs. Fixed costs include things like rent, insurance and loan payments and are easier to budget for because they always stay the same.
In comparison, variable costs change from month to month depending on your business output. Shipping costs, hourly wages to employees and utilities are all examples of variable expenses. You can also plan for one-off expenses, like buying new equipment or investing in a new marketing campaign.
5. Plan for emergencies
Regardless of how much time and effort you put into your business budget, it’s impossible to plan for everything. Emergencies will come up that you had no way of planning for, which is why it’s important to create a cash reserve.
Open a business savings account and set aside money in an emergency fund. You can use a traditional savings account or open a money market account so you’ll earn higher returns on your money.
Just make sure the funds are easy to access and liquidate if an emergency arises. An emergency fund can also provide a financial cushion if your revenue unexpectedly drops during the year.
6. Create your budget
After you’ve outlined your monthly revenue and expenses, you can create your business budget. This doesn’t have to be complicated — you can create a budget using a spreadsheet if that’s all you have available. Microsoft Excel and Google Sheets offer free budgeting templates you can use. You can also leverage software like QuickBooks to track your expenses or generate financial statements.
However, creating a budget isn’t a one-time event — you need to continue to refer back to your budget often and make adjustments as needed. For instance, you may notice that your spending is up in a certain category, so you’ll need to reallocate your funds. Or you may have an unexpectedly slow month and need to cut back on certain variable expenses.
Related: 5 Ways to Build a Business Budget for Maximum Success
Setting up your budget may be time-consuming at first, but it’s worth the effort. A good budget will give you insights into how your company is performing so you can make informed financial decisions.
No budget is set in stone, so it’s important to stay flexible and update it regularly based on market changes or business trends. It’s also a good idea to work with an accountant who can advise you on tax planning strategies.
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