In budgeting, what is often the first step for a small business?

In the budgeting process for a small business, forecasting sales for the upcoming year is a critical initial step. This forecasting serves as the foundation for the entire budgeting process, as it provides a projected revenue figure that informs all subsequent financial decisions. Accurately estimating future sales helps a business anticipate its income, allowing for better planning of expenses, investments, and cash flow management.

Understanding potential sales helps in determining the resources required to meet that demand, such as staffing, inventory purchases, and marketing expenditures. Additionally, it sets the stage for evaluating fixed and variable costs, as these figures need to align with the expected revenue to assess profitability.

While analyzing the competition, determining fixed costs, and calculating variable costs are also important aspects of financial management, they typically come after sales forecasts are established. The reason is that without a clear understanding of expected sales, it can be challenging to make meaningful decisions about costs and market analysis. Thus, the first step in budgeting is indeed to project future sales.