Cash flow is the number one reason that causes small business to fail.
Whether you run an established business or are getting started, budgeting is vital. Although it can seem daunting, a business budget doesn’t need to be overwhelming or confusing.
We are here to help. Read on for 15 tips to help you get started with your small business budget.
1. Analyze Your Revenue
The first and most important part of setting your budget is to look at your business receipts and find your revenue sources. From there you can start to calculate your expected monthly income.
Note that most businesses will see peaks and troughs in their revenue throughout the year. You want to look at multiple months and averages over your financial year.
This will allow you to track changes over months and begin to find patterns. Knowing about and predicting these patterns will allow you to expect them each year. Avoid being caught out by lean months or spikes in demand.
2. Plan for Necessary Costs
No matter what you do, many monthly expenses are necessities. If you fail to pay your electricity bills, employees’ salaries or rent, you won’t have a business for very long. Luckily, they are usually fixed, or in your control, allowing you to budget for them.
These necessary costs should always be the most important. When you get money in, these are the first expenses you should pay each month.
It’s a good idea to include a few months of these expenses in your budget in case you suffer cash flow problems. This will mean that your company is secure, even if you have to tighten your belt during lean months.
3. Plan for Variable Expenses
With your necessary costs established, you can look at your variable expenses.
These costs change from month to month. This depends on how much of the service you use, or other outside factors. Some of these, like utility bills, are also necessary costs.
Most variable expenses are not necessary for your company to function. They are an investment in the long term. These ‘discretionary’ expenses can change each month as required.
Some examples of variable expenses include:
- Your salary
- Replacing equipment
- Employee training
Set plans on how you will be able to reduce the costs of your discretionary expenses during lean months. This will save you from having to be reactive in an unexpected sales drop.
4. Understand Your Risks
Chasing a profit always has risks, and running a business is no exception. Some serious risks could impact your company. It’s important that you consider what could happen, both in the short and long-term.
Your risks could range from an increase in minimum wage and product shortages, all the way to natural disasters. Once you have looked at the potential risks and threats to your company, you can begin to plan for such eventualities.
Having looked at your revenue and expenses, you should have a sense of how much money you have on hand at any time to deal with these risks.
5. Set Goals
When you are setting your small business budget, it isn’t only about breaking even each year. You want to achieve something.
Whether that is consistent growth, a healthy profit or to save for new equipment, you should define these goals. Your budget should work towards them.
When setting goals, try to think SMART: Specific, Measurable, Achievable, Relevant and Time-Limited. SMART goals can give your budget a real focus, and as you set them yourself, will be specific to your business.
With these goals in mind, you can look for budgetary waste and reallocate money to where it will make a difference to the future of the company. As SMART goals are measurable, you can track the impact your new budget is having, and change it as necessary.
6. Set Up A Business Account
Depending on the size of your business, you may be currently running it out of a personal bank account. While not setting up a separate bank account may look easier, it can cause a lot of confusion when looking over your income and expenses.
It could even cause the IRS to exclude you from claiming certain tax exemptions. Operating a business account also helps to improve your business credit.
Even if you don’t currently have very high turnover, make sure to run your business from a business bank account. If you use any other services such as Venmo or PayPal, use separate accounts for these as well. The Terms of Service for these services often state that you use business specific accounts.
7. Hold an Emergency Fund
As in your personal life, unexpected expenses never come at a good time. There are a few ways that you can deal with a financial emergency. But holding an emergency fund is by far the simplest and easiest. This is simple to do by incorporating this fund into your budget.
Although this fund will compete for spare income with your other variable expenses, you will be glad you have it if you ever need it. If your fund isn’t large enough to cover your issue, then you can always look into a business loan. But having the option for both is never a bad thing.
You may find that you are lucky and no such emergency ever arises. Although this is unlikely, just being able to remove the stress is worth it. And if you do have to deal with an unexpected cost, the money is there to stop it from becoming an emergency.
8. Create A P&L Statement
A profit and loss statement is a handy tool to see exactly where you are, and aren’t, making money. If you have followed our other tips, you should be able to create your P&L without too much trouble. Add all your income for a month, and subtract from it your expenses for that same month.
If you have a positive number, then you were in profit that month. A negative number shows a loss. The nature of invoicing means that most small businesses aren’t profitable every month. Especially when they are starting out.
9. Analyze Your P&L
No matter how experienced you are, setting your budget is always a mixture of estimation and guesswork. If you have followed our advice and created your P&L, this will be important for helping to educate these guesses.
Look through the P&L and search for trends. You want to go through and try and explain every shift in your revenue.
Look for changes caused by weather, the economy, school calendars or supply problems and so on. Use the impact of these to predict whether you will see similar changes to your business this year. You can also use the P&L to help inform you of what investments have been worthwhile before and what you want to avoid.
10. Plan For The Sales Cycle
As we mentioned before, most businesses go through peaks and troughs during their financial year. If your company is one of them, then you need to incorporate these slower periods into your budget.
Holding cash over from the busy period will make sure you can still pay your necessary expenses. You should also try to limit your discretionary spending.
Effective budgeting will also allow you to boost your marketing during a slump. This ensures that when busy periods return, you are ready for them.
If the sales cycle means that you expect to become unprofitable for a few months, this is the perfect situation to use your emergency fund. It’ll be invaluable to keeping the business afloat until things pick up again.
11. Learn from the Mistakes
When you start working on your budget, you are likely going to make some mistakes. Don’t worry; this is a process all small business owners go through. It can even be a good thing.
You won’t have the experience to predict changes in supplier pricing, or how much of certain items you’ll need over the next year. With budgeting, the only true mistake is believing that these factors won’t affect you in the future.
Always remember these little mistakes, and use them to inform your future budgets. As you progress, your budget should start to expect these kinds of shifts, and your emergency fund will help avoid any catastrophes.
12. Put Back What You Take Out
Imagine your budget is a living entity. You won’t ever be able to predict ahead perfectly. As a result, you might need to take money budgeted for one thing and use it for another.
This is actually common especially when businesses are starting up, so don’t worry. It’s important to pay that money back as soon as you can budget for it. You want it to be there again for when you need it to cover that original project it was set aside for.
13. Keep Documents and Receipts
It might not be the most exciting part, but record keeping is essential. In fact, not tracking your finances is one of the major mistakes businesses make. You need to keep a record of every transaction, especially those you plan on deducting as a business expense. You’ll need this documentation to hand for your taxes.
This goes for all the business-related expenses like utility bills and rent and any home office expenses you plan to claim. This doesn’t mean that you need to keep piles and piles of receipts and paperwork though. There are apps and programs you can use to keep it all online.
14. Stick to Budgeting…
It isn’t an overstatement when we say the ability to budget is at the heart of a successful business. Understanding the basics like how much you are making and spending is essential. You need to be able to assess the health of your business.
At a basic level, it helps you know if you’re making a loss or a profit and by how much. It’s used to track client spending habits monthly and yearly. This’ll help you with financial predictions and forecasts going forward for future budgets.
Budgeting helps with measuring the success or failure of business decisions. If you’re not tracking the finances, you can’t know if a decision brought you loss or profit.
You might be causing your business damage by repeating bad choices. Not to mention you could be missing out on real money makers too. So stick to budgeting and recording your finances, it’ll save you in the long run.
15. …But Don’t be Afraid to Revisit A Budget
Even with your budgeting skills honed, don’t expect your budget to be static or consistent. It’s going to change and evolve along with you and your business. As growth and profit patterns change, your budget will need to.
It’s going to take time to learn the cycle of business and seasonal trends. It’s ok for your budget to undergo some changes to adjust to new or fluctuating costs. Just be mindful of this and stay on top of it, record these changes and make the appropriate adjustments.
Take a look through your monthly and annual budgets on a regular basis. This will give you a clearer, updated picture with will give you better control. You’ll know exactly how much you can spend in relation to your project plans.
Look at past market trends when preparing for the year ahead. This will help you factor in your emergency funds and any unexpected costs.
Managing Your Small Business Budget
As you can see, there are lots of things you can do to make the small business budget both easier and more beneficial.
By isolating your business expenses, you can easily track exactly what is coming in and going out. This information allows you to effectively plan for the future, and allocate your funds in the most effective manner. This means your budget will help to protect your from cash flow problems, while also helping you to work towards your business goals.
If you found this article useful, and you are curious to learn more, check our resource section for other topics that we have covered. We have the knowledge to help you get the most out of your business.