How to Build a Budget for Your Small Business

A budget becomes more realistic when it is based on as much objective, factual information as possible. By taking what you know and what you can find out and using that information as building blocks, you can develop a budget that will be a useful tool in assessing your performance and managing your business.

Instructions

Things You'll Need:

• Research, quotes, documentation and information

1. Step 1

   Structure the budget based on the way the business operates. The budget for revenues and expenses should be at the same level of detail as they will be recorded for actual operations.

2. Step 2

   Start putting together a budget from the bottom, at the lowest level of detail, and use concrete pieces of information, basically quantities, hours, prices and rates, to construct the various line items of the budget. Break down each item into its component parts.

3. Step 3

   If your business involves making a product, determine the inputs in terms of raw materials, supplies, and labor. Calculate the budget by multiplying quantities of raw materials and supplies by their corresponding prices, and hours of labor by the wages of the people involved.

4. Step 4

   Budget salaries and wages based on the hourly wage or monthly or annual salary contracted, or that you expect to contract with each person.

5. Step 5

   Budget payroll taxes by multiplying the applicable rates for Social Security, Medicare and unemployment taxes by the salary and wage base.

6. Step 6

   Budget employee benefit plans such as health insurance and pension plans by getting quotations from insurance companies, brokers, or other providers, based on your salaries and wages budget.

7. Step 7

   Budget rent expenses for offices or facilities based on the monthly lease contract offered. Budget the expense for rental equipment based on hours (which could be based on the production budget) and hourly rates.

8. Step 8

   Budget insurance expense by getting quotes from insurance companies for the types of coverage your business needs.

9. Step 9

   Budget the expense for utilities such as electricity, gas and water by multiplying usage by the rate. You may be able to estimate usage based on a similar business or facility.

10. Step 10

    Budget telephone expense according to your cell phone plan, or get a rate from the telephone company for a plan for a land-line phone.

11. Step 11

    Budget transportation expenses for vehicles by estimating the number of miles to be driven and multiplying by the cost per mile for fuel, according to the vehicle's average mileage per gallon. Add an allowance for repairs and maintenance.

12. Step 12

    Budget travel expenses by estimating what trips will be taken and to where. Then get quotes for airfares and hotels.

13. Step 13

    Budget interest expense based on the amount of financing times the applicable interest rate, for example, the credit card interest rate or the bank loan interest rate.

14. Step 14

    For budgeting capital expenditures, prepare a list of all the property, plant and equipment you need. Then get price information from catalogs, price lists, auctions, or want ads based on make and model, or request price quotes or from providers.

15. Step 15

    Once you have a capital expenditure budget, you can budget depreciation expense based on the cost of each asset and the expected useful life. Depending on your accounting methods, you could use straight-line depreciation or an accelerated recovery system like that used for income tax purposes.

16. Step 16

    One way to budget sales revenue is to set a unit price by applying a percentage markup on the cost of making each product. This should be based on the total cost of each product, including the direct costs of raw materials, supplies and labor, and the indirect cost of overhead, such as administrative and management salaries, utilities, maintenance, depreciation, insurance and other general expenses. Once you have a budget for these overhead expenses you can allocate them by dividing the total overhead cost per month by the number of units of product you expect to be able to make each month, based on available time and resources.

17. Step 17

    Another way to budget sales revenue is based on competitors' prices for the same or similar products. Add an incremental amount if your product has added value. A market study can provide valuable information in setting prices.

18. Step 18

    If you plan to pay sales commissions, budget them as a percentage of the sales revenue budget.

19. Step 19

    Budget advertising expenses based on quoted rates for the type of ad and the medium you plan to use.

20. Step 20

    If you are in the services business, budget your revenue by multiplying the expected billable hours by the rate to be charged per hour, broken down by person if different people are performing different services at different rates. Factor in a sufficient number of non-billable hours.

21. Step 21

    If your business involves jobs or projects, break the costs down into materials, supplies, tools, equipment, direct labor, rentals, subcontractors and overhead. Prepare a materials list and get price quotes, prepare a job schedule for direct labor, get bids from subcontractors, and make an overhead allocation. Once you have a budget for the costs, budget your revenue to allow for a sufficient profit.