Creating a succinct budgeting plan for your business can help support the long-term health of your business, because like the personal budgeting plan, it’s a way of keeping yourself accountable to every dollar that comes in.
Your business budget will be like a record that acts as an autopsy of sorts for you to monitor how your business acts. You’ll be better able to tell what the optimal places are to spend and at what time in order to stave off getting into debt.
You can monitor where you have excess funds so that they don’t inadvertently go to waste, but instead can be put back into the business. You’ll also be better able to keep a healthy balance in your income by knowing what to put away during a feast, so that you’re better able to weather the storm during a season of famine.
As a business owner your income isn’t a steady paycheck like what you give your employees if you have them. You’ve got to be aware of every dollar so that you can stay in business and keep food on your own table. Using a budgeting system can also help create a strong infrastructure for your business, so that making money is a seamless process for you.
You’ll have a clear picture of your profit and losses, and so can have a bit of a glimpse into the potential future. You’ll be better prepared and better able to take advantage of opportunities as they come.
If there’s an opportunity to expand or sell, form a partnership or other such ventures, you can do so in full confidence, minimizing your chances of being taken advantage of while maximizing the value that your business is worth.
In knowing what’s going on in your business at all times, understanding the full potential of it and being able to take advantage of it, you’ll significantly lower your chances of being among the majority of businesses that are likely to fail.
How to Create a Business Budget in 6 Simple Steps
Like a personal budget, there are some basic steps to creating a budgeting plan for your business. You’ll notice that there are a few similarities, but there are some key steps to business budgeting that make it a bit more extensive than a budget for personal spending.
Step 1: Examine Your Revenue
The first step is to examine your revenue, and you can use last year’s revenue as a guide. Then, examine what your sales goals are, so that you know exactly what you need to produce or how many clients you need to service.
Remember, a lot of businesses do not succeed because of a failure to understand the market they’re in. You need to do a fair bit of research in order to market to your clientele in a way that’s attractive, and then service them in a way that’ll increase your referral rate.
A big part of your success in the market is going to be determined by competitive pricing. You can either provide your market with what they’re looking for with a fairer price than your competitor, or provide them their need and more in such a way that justifies your raised price if you have one.
Step 2: Determine the Fixed Expenses
From your revenue, deduct all of your fixed expenses. You can deduct them right away because they’re easier to determine on an on-going basis and are usually a part of the list of essential expenses anyway.
You’re looking at expenses like rent or mortgage and supplies like we talked about before, but also expenses like debts. You’ll not want to forget those—the sooner those can be repaid or at least minimized, the sooner you can focus your increased revenue elsewhere.
Additionally, don’t forget the other essentials like payroll, taxes and insurance, but also depreciative expenses as this category of fixed expenses goes toward your deductions for tax-year’s end.
Step 3: Determine the Variable Expenses
Determine your variable expenses. This can be difficult to do for a business as there are so many varying factors that determine your needs, like seasons, market demand, and such. Start, however, with those variable expenses that are essentials, like marketing, production costs, and utilities.
If you have to, simply set aside a sum of your revenue dedicated towards paying any other variables. Once you’ve kept an extensive enough record, you can begin to categorize some of the rest of your variable expenses.
Step 4: Keep an Emergency Fund
We’ll keep this step short as it has to do with (you’ve guessed it!) putting away money for an emergency fund. This crucial step should be a priority in every monthly budget until you’ve got at least three to six months worth of revenue saved up.
In a business, you’re dealing with much higher figures than with a personal budget, so recovering from a downturn can be more difficult and take longer. Be prepared.
Step 5: Keep a Profit and Loss Statement
Keep a clear and succinct profit and loss (P & L) statement in which you separately add up all of your income and costs for the month, and then subtract your costs from your income.
You’ve already done this in steps two and three, so you’ll now have a brief overview of how your business has done in the last month.
Keeping all of your P & L statements in order can give you an overview of how your business has done over some time. You can then zero in on the months where you didn’t do so well, allowing you the chance to go over all of your paperwork from that time to try and find out why.
Step 6: Study Your Profit and Loss Statement
That is the final step, actually: Studying your profit and loss statements in a forward-looking way, so that you can create your business’s future. Did you suffer from beneficial losses during some of those downturns? For example, you might have invested in some expensive but much-needed equipment.
Look at the months that followed, however. Was the beneficial loss in equipment worth the investment to your profit margins? Did you see any seasonal trends in your business, and did they affect your business in a good or bad way?
Do the weather and natural disasters have an effect on your business? Maybe you find that your business relies heavily on the strength of the economy, or alternatively, it does well in a downturn in the economy. Is your business affected by back-to-school or tourist season?
These are important things to know, so that when you know those seasons are coming up, you can properly prepare to secure your revenue or take advantage of a profit.
Forecasting Your Income and Expenses
Look at your past years, and identify every single source of income you’ve had. Look at the patterns like you looked at the ones in your P & L statement. Maybe you have to make changes or updates to your product or service in order to keep up with the demand that each season brings. How does inflation affect the cost of you running your business?
Will it cause a price increase to your clients? How can you market it in a way that you give them enough of a heads-up, and they still feel like they’re getting value? Will you have to hire or fire people, and make changes to some of your existing contracts?
You want to be able to manage all of this in a way in which your client and employee relationships are well nurtured. If your relationships are healthy, you’ll become the kind of business that people rely on.
Now that you’ve been able to get a better idea of your cash flow, you can rest assured that the decision-making aspect of every part of your business will be a little easier for you to do as you’ll be better informed about your own proceedings in business.
All of the principles for best budgeting strategies and saving money apply to your business too but with some added suggestions. When it comes to capital expenditures, for example, like equipment or vehicles, determine if it might be better for your business, at least for the short-term, to lease or rent these expenses.
Particularly if you’re a small business owner, you want to be able to lower your fixed expenses wherever you can. No matter the size of your business, however, prioritize organization! It’s easy to simply gloss over this habit, but being organized is the foundation of maintaining clear and cohesive books.
Don’t throw all of your receipts into a pile, telling yourself that you’ll get them organized over the weekend. File them away in their proper folders (usually, separated by category) right away, and log them into your budget sheet.
Depending on the amount of receipts you’ve accumulated that day, this task may only take 10–20 minutes before suppertime. You were probably going to scroll your various social media feeds for 20 or 30 minutes anyway; file away your receipts instead.
Come the weekend, you’ll be glad that you did. If you’ve simply thrown all of your receipts in a pile all week, you’ll spend most of your weekly budget review, combing through receipts and trying to remember where these purchases came from.
This alone could take an unnecessary hour before you even start assessing what happened for your business financially. You’ll pick up the habit of dreading your weekly review, until one day you start procrastinating even that meeting. By the time you get to doing your quarterly tax filings, everything will be a mess!
Create a system that you like and is easy for you to maintain throughout the week. Just be sure to not take for granted the few minutes it’ll take for you to maintain your system each day. You shouldn’t procrastinate doing something just because the effort required is seemingly small.
A 10-minute task that you put off now will most likely turn into a 30-minute task you’ll be forced to do later. Finally, look to split your net profits into these three different accounts: Taxes, personal, and business. In general, these categories will take care of your immediate responsibilities.
For taxes, remember it’s 25% of your gross income or 35% or your net income, while your personal account should be replenished every month with your bare minimums.
For the business account, you’ll determine your cash flow on your own, like we talked about before. Once you get into a place with your business in which you can put money back into your business while still maintaining your emergency and discretionary funds, then you can begin to have some fun with having your business flourish.
Just a quick note on insurance: It brings the same value to your business as any of the other types of insurance purposes we talked about. You can budget with your insurance premiums in such a way that you won’t have to worry too much about your emergency fund!
For example, if you have a disability insurance that’ll pay you a claim if you fall ill or get injured within three months of you making that claim, then you really only have to worry about saving up three months worth of income instead of six.
You can allocate those extra month’s savings somewhere else. Additionally, having some kind of group insurance for your employees’ health benefits is an added bonus while hiring that could create more employee loyalty.
Here’s a list of various types of insurance to consider when you’re in business for yourself, keeping in mind that business insurance might cover you for some of these liabilities already.
- Professional liability
- Property insurance
- Worker’s compensation insurance
- Additional equipment and inventory insurance for your home business
- Product liability insurance
- Vehicle insurance
- Business interruption insurance
How to Prioritize When Categorizing Expenses
Making sure your budget is as user-friendly as possible is going to be important for the sheer fact of how many moving parts there are to a business’s infrastructure. There’s a concept in running a business that professes you shouldn’t spend so much time in your business but rather on your business.
That is to say that it’s inefficient for you to spend the bulk of your time picking up loose ends or putting out fires. Rather, your business should run in such a seamless way that you can allocate the bulk of your time to strategies that’ll help your business grow and innovate.
Every type of business is different, and added to that you might just now be discovering your own sense of budgeting style as well.
What every business can agree on, however, is that it needs to measure profits and losses in as accurate and efficient a manner as possible. Start by assigning categories to the items you’ve spent so far, and if you’ve been in business for a little while now, you can use a list of last year’s expenditures.
Here’s a list of expenditures to include in your budget that you’ll already be familiar with:
- Payroll and anything to do with salary and employee benefits like health insurance or retirement contributions
- Any deductions made and any other documents for tax purposes
- Rent or mortgage payments, along with utilities, communications, and internet
- Office furniture, equipment, office supplies, and any other kind of sundries
- Maintenance and repair
- Vehicles and any fees toward transportation and maintenance
- Business travel
- Professional fees (e.g. your accountant, licensing fees, etc.)
- Marketing and advertising
- Payment processing
- Software and subscription services
Depending on the type of business you have, this list may be in a different order, but the idea is to prioritize whatever will keep the doors of your business open long-term while maintaining your good standing with your lenders and investors.
Budgets, finances, and spreadsheets are not a favorite pastime of most business owners. That’s simply not why people become entrepreneurs. Still, you have to budget when you own a business. It will be easier for you as a business owner if you know how to create a budget and manage it effectively.