Does money seem to be flying out of your account faster than it’s being earned? Are those lunches costing you more than your marketing materials? If you don’t know where your money is going, or if you aren’t keeping track of what you are spending your money on, then it may feel like you’re playing a game of chicken! 🚗🐤 And that’s when you need to start thinking about a budget – BIG time! 

Every small business should have a budget.  Without a budget, you wouldn’t know whether your business is spending too much money, or if you have enough money for a bigger investment.  By having a budget, you’re creating a blueprint for spending throughout the month that will keep you on track for your financial goals.  And, when done correctly, it will help you stay on track and manage your money better to help you grow your revenue faster. 

What is a budget?

Just because you start your business, doesn’t mean that spending money ends.  Businesses will always have something to pay for to maintain business operations.  Some are daily, weekly, monthly, yearly, or somewhere in between.  To keep your mind calm 🧘 and your money steady, you need to outline these expenses in a way that makes sense for you and also helps you improve your financial situation and keeps your business from going under. 

To be a successful business you need to know where every dollar goes and put it on PAPER (or at least a digital form of paper 💻)!  

How do you create a budget?

Before you start to create your budget, there are a few cardinal rules you should follow to set yourself up for success. 

Separate your personal finances from your business ones.

It may be tempting to use business finances for personal items, but it also can lead to disaster in many ways.  You will never have a clear picture of your business costs and revenue without it being muddied by additional costs that do not correspond to your business or its goals.  It’s harder at tax time to allocate those expenses.  And finally – it blurs the line between business owner and business – and the liabilities can get tricky.  

You can easily separate the two by obtaining a business checking and credit card and only using them for business costs and revenue.  You also want to make sure that you are using different accounting systems for your personal versus business accounts – to keep from them intermingling. 

Set aside money for an Emergency Fund

You always want to prepare for the worst – because anything that can go wrong, will go wrong (at least at some point).  It’s important to be prepared for those things so they don’t cause your business to stop operations because of an unforeseen cost – a printer breaks, a surprise water leak in your warehouse…Those things happen, and there is no warning – but your emergency fund will save the day!

1. Identify your revenue streams.  

As a small business, or any business, cash flow is KING. In order for your budget to work, you need to be aware of how much revenue you are bringing in (revenue is the money you bring in BEFORE your expenses).  Go through and tally up all of the money you bring in and where it comes from.  Sum up your total revenue for the year and divide it up by 12.  This will take out any seasonal sales cycles to allow you to plan and BUDGET for revenue streams that ebb and flow throughout the year. 

**Pro-tip: Understand your sales cycles.  Most businesses will have slow months and big months. It’s important to know your yearly revenue, and then on a monthly basis when you re-evaluate your budget, you can adjust the revenue for that specific month to match the point of the cycle you are in.  But it’s good to start at the total annual revenue in case you need to BUDGET for those slow months ahead of time.

2. Determine your fixed costs. 

Fixed costs are costs that remain constant – you can count on them being the same amount and the same frequency all the time. Rent, insurance, loan payments – those don’t change.  No two businesses are the same, so it’s important to run through your expenses and identify all of your fixed costs.  Sum them up and divide by 12 to get an accurate month-to-month amount.  If your business is new – that’s ok too.  You can try and estimate these costs until you have real data to fill in. 

3. Determine your variable costs. 

Variable costs are inconsistent expenses; they change depending on how your business is doing or how you use certain tools.  Things like shipping, marketing, utilities, supplies and workforce salaries (if hourly or contract work is your method of payment). 

**Pro-tip: Over-estimate your expenses! No client or project is the same, and it’s hard to predict exactly how much you will spend.  It’s always better to overestimate and be left with extra money in the end, instead of under-estimating and scrambling to find extra revenue. 

4. Create a profit and loss statement.

This isn’t nearly as scary as it sounds. It can be a simple formula that you can take from your Google sheet of revenue and expenses if you don’t have a full-time accountant.  You’ve already done all the heavy lifting by getting your revenue and costs tallied up.  The final piece is to calculate how much money is left (or negative).

Total Revenue – Expenses (Fixed & Variable) = Profit

It’s as simple as that.  If you do that equation and you have money left over, your budget is green and you’re profitable! If you are in the negative, you will need to reevaluate your costs and income streams until you’re able to get in a profitable state.   If you need help cutting your costs, refer to our blog on Cost Cutting!

**Pro-tip: If there is a big ticket item you have your eye on, or you are thinking of expansion – there are a few things you need to do to adjust your budget to reach that goal.  First – determine how much the big ticket item is going to cost and roughly much time you want to take to purchase the item.  Next, add a fixed cost to your monthly budget to save money for the big ticket item and put it aside in a separate account (or track it so you know how much you’ve got in your account for that item). And, if you have any excess money at the end of the month, you can decide if you want to put in more than the budgeted amount to reach your goal faster. 

5. Evaluate and Adjust Monthly. 

Once you set up your budget, the hard work is over.  BUT a budget is a tool that needs consistent review. You should come back and re-evaluate your budget every month (preferably work one or two months ahead so you’re prepared when that month comes and know the goals you need to hit).  Your expenses and revenues are always changing.  You may have a new client that increases your revenue.  You may have developed a new product that requires more variable expenses.  This also is a good way to incorporate seasonality into your expenses and revenues to help better plan for your monthly spending. 

At the end of every month, the best thing for you to do is compare your budget to your actual spending.  Doing this, it will allow you to see where your money actually went, how accurate your budget was, and help you adjust your budget in the future to help bring your estimated budget and actual spending closer together. 

While there is no magic spell to identify all of your revenue and expenses ahead of time, a budget is the next best thing to help you plan for what’s coming next.  There will always be changes or unexpected costs.  Having a budget that is easy to understand and change will be your new financial best friend.  Budgeting isn’t scary, but not knowing where your money is going is…Don’t get caught in the dark 😱!

TL;DR

Understanding what money is coming in, what’s going out, and how to track the never ending expenses that come with owning a business can be very stressful.  Quickbooks is a great tool to help you keep track. To make it easier on yourself, develop a budget that can help guide your spending decisions and take the thought out of spending. Creating a budget is easy! All you need to do is know how much revenue you bring in every month, determine your fixed and variable expenses, and calculate the difference between the two.  If there is a positive cash flow – your budget has you set up for success; if there is a negative cash flow, your budget needs some adjustment.  It’s that simple! Don’t let the fear of the unknown keep you from making sound financial decisions…Create a budget and drive towards financial security! 

Feeling overwhelmed and need a little guidance? Schedule a call today!