Setting a budget is one of the most important things you can do for your personal and business finances. As a small business owner, every penny counts. If you’re not taking the time to track expenses, revenue, and other miscellaneous spending, you’re potentially putting your business in danger of financial stress–especially in the beginning stages.
To become successful, it’s crucial to track just exactly how you are spending your money. This may sound daunting, but if you take the time to set it up initially, you will benefit in the long run. To help make the process a little easier, we’re sharing our step-by-step guide to setting up a small business budget.
Why You Need A Small Business Budget
First and foremost, you need to understand why it’s important to have a small business budget. A study done by CBInsights showed that 29% of small startups fail because they ran out of money. While that percentage may seem relatively low, the last thing you want as a business owner is to be unsuccessful because you didn’t manage your finances properly, especially when this can be avoided.
And while being successful is the primary focus for most, there are other advantages to having a budget set up. Some of those advantages include:
- Being able to forecast what money you expect to come in
- Making your business more efficient
- Spotting extra income that you can potentially reinvest
- See the difference between your spending plan and reality
- Help you stay prepared for tax season
- Providing a glimpse of the future of your business
How To Set Up A Small Business Budget
Decide How You’re Going To Set Up Your Budget
The first thing you’re going to want to decide is how you plan on setting up your budget. Many people opt for a spreadsheet. If this is what you’re most comfortable with, consider using a pre-made template such as this one from Capterra or one of these from PDFConverter. If you prefer to use an accounting program, we recommend QuickBooks or Wave.
Examine or Forecast Your Revenue
Once you decide which system will work best for your business model, you need to estimate your future revenue. If you have already started your business, don’t fret. You can still create a budget–you’ll just want to look at your previous numbers. If you’re just starting, it’s wise to look at the industry standard to help you decide what to expect.
If you’ve already established your business, calculate your revenue monthly–ideally, you’ll be able to crunch the numbers for at least a few months. It’s important not to calculate your profit, as revenue is the money that comes into your business before expenses, and profit is what is left after said expenses. The more months you have to look at, the more you can understand patterns that occur, which will give you the chance to prepare for slower seasons.
Related: Revenue Vs. Profit: What Makes Them Different?
Determine Your Fixed Costs
Your fixed costs are expenses that you have for your business every month. This can include rent, payroll, IT costs, insurance, bank fees, accounting services, supplies, taxes, and more. They can occur weekly, monthly, even annually.
To make sure that you don’t miss any, take a look at previous account statements. If you are a new business or you add a new expense, be sure to add it to the budget as soon as possible. Once you have these tallied up, you’ll subtract them from your revenue total.
Calculate Your Variable Expenses
Along with fixed costs, you’ll also likely experience variable expenses, aka expenses that change. These expenses can be anything from raw materials, inventory, production costs, credit card fees, office supplies, utilities, marketing costs, hiring a freelancer, etc. While these numbers do change, a clear budget can help you break down what you expect to spend on these costs.
These variable expenses can be increased or decreased depending on how your business is performing. During months when there’s a lull in business, you can trim down on these expenses. During profitable months, you can increase spending for long-term benefits.
Set Up An Emergency Fund
One-time costs are inevitable. Whether it’s a new computer or broken equipment, you’ll run into these inconvenient costs. Prevent fear of these expenses by having some padding in your budget. If you’re unsure how to do this, consider taking the extra money you don’t use on variable expenses one month and putting it into a savings account. Doing this will help you have peace of mind and help you avoid small business loans.
Related: 8 Money Mistakes Small Businesses Make
Outline Profit And Loss
This is the step that stresses business owners out the most. After calculating all expenses and savings and subtracting them from your income, it’s time to calculate your profit or loss. If the number is positive, congrats, you made a profit! If the number is negative, don’t fret. Small businesses aren’t always profitable every month. It’s normal to notice deficits in the first few months of starting.
If you are an established business and find yourself in the negative, check your expenses and see if there are places you can cut costs. Can you find a cheaper insurance company? Can you skip out on a variable expense for a few months? These changes may seem small, but they can add up quickly.
Do A Monthly Analysis
To maximize your budget’s potential, it’s crucial to maintain it regularly. If possible–at a minimum–check in on your budget at least once a month. This will help you gauge whether or not you are making a profit or experiencing loss. From there, you can adjust as needed!
As a small business owner, you wear many different hats–one of those being accounting. While very few business owners enjoy putting together budgets and tracking finances, knowing how to set a budget up will help you succeed in the long run. Follow these steps, and we promise it’ll be easier than you think.
Here at Cloud Friday, we help our small business clients get their finances organized and get them the education they need to grow. We focus on establishing a solid foundation and exploring the opportunities to scale. If this is something you’re interested in, feel free to contact us here.