Budget allocation is a necessary skill to master when building a business. A proper budget can help your business achieve its financial goals and prepare for market shifts throughout the seasons. Creating a digital marketing budget usually involves the best assumptions on how the money will be spent, without really knowing if you will receive any return on investment (ROI). This can be a risky investment, but some risk should be taken to see what types of marketing campaigns can be successful.
A business budget estimates future revenue and expenses in great detail in order to see whether the company is on track to meet financial expectations each month, quarter, or year. Think of a business budget as a point of comparison – running actual numbers against it can determine if your business is over or under budget. An accountant can help create a budget in QuickBooks, which is ideal because they can run actual vs projected figures side by side.
Creating an efficient budget has several advantages to your business, including:
- Establishing a financial plan that helps your business reach its goals
- Allows for asset allocation with any leftover funds
- Predict slow months to stay out of debt
- Allows your business to prepare accordingly for the future
From here, you can make informed decisions and pivot accordingly. For example, if you find that your business is not bringing in the revenue you may have expected, there is room to grow. Including digital marketing into your business is one way to do this. There are also multiple types of business budgets to utilize.
Master Budget —
A master budget uses information from financial statements, expected revenue, and your financial plan in a single document. This can be used to plan marketing strategies to reach business goals.
Operating Budget —
An operating budget shows projected revenue and expenses for any given time period. This can include fixed and variable expenses. Think of this as a profit and loss report, but for the future. This is typically prepared at the beginning of the year, but can be updated monthly or quarterly to stay in check.
Cash Budget —
A cash budget gives businesses an estimate of how much money comes in and comes out during a certain time. This is created by using conclusions from projected sales and production, and by estimating payables and receivables.
Although there are multiple types of budgets to master, they all have the basic steps in common. There are several steps to accomplish this goal:
How to calculate a business budget
1. Calculate Total Revenue
Include all streams of revenue over at least the past 12 months to determine your monthly income. Notice how the monthly income changes over time and try to look for seasonal patterns. Some businesses don’t perform as well after the holidays or during summer months. Understanding seasonal changes is important for brainstorming strategies to improve marketing tactics during busier months.
2. Add up all the fixed expenses
Fixed costs occur biweekly, monthly, or yearly and usually do not change. Examples include rent, payroll, employee salaries, insurance, debts, and various assets. These fixed costs can be used to reliably predict future costs. Once these are determined, subtract the fixed costs from your income.
3. Add up all the variable expenses
Variable expenses are anything that depends on usage. Examples can be utilities for an office building (if necessary), billable labor for employees or owner’s salary, raw materials, and transaction fees and commission.
Look at how the variable costs have fluctuated over time, and use this information to predict future variable costs. This can also help determine if there is a need to reduce the number of employees, reduce in-office time to cut down on electricity, or change distribution companies for raw materials.
4. Subtract the fixed and variable expenses
Once the fixed and variable expenses are determined, subtract them both from your income. This determines what it costs to produce your product or service. This is how to determine how much profit your business makes yearly after subtracting all expenses.
5. Set aside a contingency fund for unexpected costs
Make sure to put aside any extra funds to allocate for various marketing strategies. New marketing strategies, such as digital marketing or SEO, can drive a higher return on investment. In addition, these extra funds can be used for unexpected expenses like equipment breaking down. It’s best to always be prepared for the unexpected.
6. Determine total profit
Add up all projected revenue and expenses for each month. Then, subtract expenses from revenue. The resulting number is known as net income. If it’s positive, it’s best to assume a profit was made. If it’s negative, this is known as a loss. Don’t stress, small businesses aren’t necessarily profitable every month or every year.
7. Finalize the business budget
This is the opportunity for marketing budget allocation. Marketing strategies can be improved, and new ones can be implemented. This is also an opportunity to set spending and earning goals for each month, quarter, and year. Keep fixed and variable expenses in mind; make sure the earning goals are both realistic and achievable.