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Due in large part to the difficulties imposed by the COVID-19 pandemic, today’s financial landscape has become difficult for many businesses to navigate. Surveys from the Federal Reserve Bank revealed that 3 in 10 businesses in the United States report that they are unlikely to survive 2021 without government assistance. Another 8-in-10 claimed to be in poor financial condition despite already receiving support from small business relief efforts like the Paycheck Protection Program.

Given these difficulties it is more vital than ever that business owners take a proactive approach toward protecting their finances. And one way to do so is by developing a sound business budget. According to some of the posts on budgeting by AskMoney, tracking cash flow through an effective budget can help business owners make smarter decisions about how they spend their money. It also makes it easier to pay off debts or set clear financial goals.

If this sounds to you like an effective way to get your business back on track for financial success, the following tips can help you get started.

Examine monthly revenue

 
First, determine where your business’s money comes from. Once you’ve identified all income streams, add them up to determine exactly how much money your business takes in over a set period of time. You can choose any timeframe, but it is most common to calculate income per month since neither yearly nor weekly calculations can give you a clear picture of regular sales patterns.

Identify fixed costs

 
After determining how much you make in a month, identify your recurring expenses. Most businesses will have to account for employee salaries (including benefits packages), rent, supplies, taxes, insurance premiums, and possibly loan repayments. Though not all expenses recur on a monthly basis, it will again simplify things if you can estimate related costs per month as precisely as possible.

Once you’ve identified your fixed costs, you can subtract the total from your monthly income.

Identify variable costs

 
Not all expenses come at fixed, predictable times (or even in predetermined amounts). There are also changing expenses known as variable costs. To identify your main variable costs, determine what products or services your business often uses, and how often you need them. Consider as an example your utility usage. Your business might well spend more on electricity during summer and winter than in spring and fall. If you catch spending patterns like this, you can adjust your budget such that it anticipates rising and falling costs.

When income is high, you can also include discretionary expenses for costs that increase profitability. For instance, if you run an e-commerce shop, you might spend extra money on advertising to drive traffic to your site. However, since these expenses aren’t always necessary for day-to-day business operations, they’re usually the first to go if profit slows down.

Decide how much to set aside for savings and emergencies

 
Once you’ve identified all your operating expenses and subtracted them from your income, you can determine how much you want to set aside for savings. Within this effort, you can have separate categories for savings that will be used for the growth of your business, and those that you’ll use to accommodate unexpected expenses.

An article on saving by Practical Business Skills recommends setting aside three-to-six months’ worth of income for emergencies, if possible. With this kind of cushion on hand, you'll be more likely to be able to keep your business afloat amidst slow sales periods, or even an unforeseen disaster such as so many experienced in 2020.

Adjust your budget according to your situation

 
With all of the above tips taken into account, it is also important to tailor your budget to the specific industry and situation you're in. Our piece ‘Business Plan vs. Forecast vs. Budget’ recommends using past records to predict and guide future decisions. Looking through records, you might identify important factors like certain seasonal trends in your income and spending. For example, if you run a restaurant you might notice that you attract more customers during the summer months due to tourist traffic, or simply the fact that more people are out and about. Using this information, you can increase your supply of food or scout more hires to generate more revenue during these high-volume months.

It's just one example, but it speaks to why analysis of past business activity also matters in building an effective budget. Knowledge of the past prepares you to handle the future.

All of this takes a fair amount of effort in the end. But if you put in that effort and build a sound budget, you can help set your business up for financial success even in difficult times.