Proper budget forecasting allows you to better understand your funding needs and can help secure a business loan. To project your budget, estimate sales revenues, one-time costs, variable expenses and reoccurring expenses.
Budget Sales Revenue
Begin the budgeting process by estimating sales revenue. To figure sales revenue, identify how much of each product your service you expect to sell during the accounting period. Then, multiply that number by the selling price per unit. For example, if you expect to move 1,000 units of inventory your first year and sell them for $30 each, your projected sales revenue is $30,000.
Managerial consultant Brian Tracy recommends that managers base revenue projections on historical performance, market analysis and other financial trends. For example, if sales for a certain product have been growing steadily by around 10 percent a year, projected sales for that product should be 10 percent higher than last year.
Entrepreneur notes that many small businesses make the mistake of overstating revenue. Be realistic regarding how much product you can expect to sell.
Budget Start Up Expenses
If you're starting your business from scratch, you'll incur some costs necessary to open your doors. Potential start up expenses include:
- Legal fees
- Website and logo design
- Licenses and permits
- Consultant fees
- Decorating and remodeling
- Signs and advertising
Another significant cost is the purchase of machines, furniture, computers and other assets. These reduce your available cash, so list them in your cash flow budget. However, asset purchases aren't technically an expense -- they should instead by listed as capital expenditures on budgeted financial statements.
There's no simple formula to estimate your start up costs. You'll need to get quotes from vendors and consultants, look up the cost of the required licenses and permits, and research prices on assets you'll need to buy. Your local Small Business Development Center may be able to provide you more insight on what start-up average costs are for similar businesses in your area.
Budget Variable Costs
Budget the variable costs for the desired period. These represent expenses that have a direct correlation with the number of units you sell or produce during the year. Variable costs for your product may include:
- The cost of raw materials or inventory
- Any labor cost incurred to get the product to a finished condition
- Shipping costs
- Sales commissions on units sold
To budget variable costs, multiply your direct variable costs per unit by number of units you expect to sell. For example, if variable costs are $10 per unit and you expect to sell 1,000 units, budgeted variable costs are $10,000.
Budget for Reoccurring Expenses
Budget for the reoccurring expenses you'll incur during the year. According to Business Know How, common reoccurring costs include:
- Payroll taxes
- Professional fees
- Postage and office supplies
- Telephone, internet and web hosting
- Business insurance
- Health insurance
- Interest payments on any business loans
As with start up costs, estimate your reoccurring expenses based on your understanding of the business' needs, your cost research and any expert insight from local small business resources.
Budget Your Net Income
To project your net income, subtract all budgeted expenses from sales revenue. For example, say that you have the following budget:
- Sales Revenue: $30,000
- Variable Expenses: $10,000
- Start up Expenses: $5,000
- Reoccurring expenses: $10,000
In this scenario, your budgeted net income is $30,000. Subtract the $25,000 in expenses for a total of $5,000 profit.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.