A great way to lose your customers, your employees, and perhaps your entire business is to spend every day blissfully unaware of how you’re going to have money in the bank to keep things working. No one’s business runs for free, and understanding the costs of doing business can help make your company stronger than your competition.
Building a small business budget is going to help keep you running smoothly.
I remember my first Budget. It was a 1994 Chevy Astro Van with vinyl interior. Thing ran like a dream and managed a respectable 17 miles per gallon. As it turns out, I don’t know how to build a 1994 Astro, so today we’ll cover building your small business’s budget instead. I hope that’s okay.
What is the goal of a budget?
The goal of a budget it to give you guidance in achieving your other financial goals. When the end of the year rolls around, you want to have generated $X of profit. Since Profit is Revenue minus Costs, a budget gives you a way to track and plan the cost of business in line with your revenue generation.
For example, let’s say you wanted to have $200,000 in profit at the end of the year. Last year, you earned $350,000 in revenue and spend $175,000, for a $175,000 profit. This year, you plan to grow revenue to $450,000. To get to $200,000 in profit, you know that you can only spend $250,000 over the year.
A budget takes that known quantity and makes it meaningful. How much can you spend on office supplies this month in order to keep the plan in place? Check the budget.
A budget is not a record of the money that you’ve spent. If you budget $5,000 for March and then spend $6,000, you need to make a change to your plans for April to get back on track. You don’t just hope that you spend less or dust your hands off and say, “We’ll get it next time.”
Budgeting is only as good as the actions you take based on the budget. In that sense, it’s a plan, the same as any other.
How can you make a small business budget?
The easiest way to budget is to take your expenses from the previous year and adjust them to fit your upcoming year’s growth forecast. In the previous example, we had a forecast for revenue growth that relies on spending a certain amount of money. Figuring out that link is the first step to building your budget.
I know I just said a basic forecast is the easiest thing to do, but the real easiest thing to do is to get some budgeting software and just fill in the blanks. If you already have an accounting package in place, you likely already own some basic budgeting or forecasting software.
No matter what system you use, you – or your lovely computer – will be doing some forecasting. Keep in mind, your costs won’t scale directly with your revenue. Most businesses pay a sizeable chunk of their monthly budget to their landlords, utility providers, and to other fixed-cost providers. Growing your revenue by 20% doesn’t usually mean that you’ll be paying 20% more in rent.
Forecasting is an acquired taste and is more art than science. You’ll have to examine your revenue, known costs, and unknown costs to make a really good budget.
Yes. Unknown costs are the feature that separates a good budget from a great budget. Planning for rent, a new hire, car insurance, and the like make up the core of any company’s budget. The companies that excel at budgeting are the ones that keep enough aside for unforeseen costs.
A small business director from Capital One emphasized the importance and gave some insight into the nature of unplanned expenses in an interview with Bloomberg. “[Don’t] constrict your business from taking advantage of good opportunities,” she said. “But do build a financial cushion into your budget.”
The point of a budget is not to keep you from spending money – it’s to keep you from wasting money.
Keep on top of the budget
Break your budget into yearly, quarterly, and monthly expenses, and review it on that schedule. A review allows you to reassess the reality of your predictions, first and foremost.
Maybe you thought you were only traveling out of state once, but you find that business takes you three times. That’s not the end of the world, but it does have an impact on the amount of cash you’re going to have on hand later in the year.
Checking in with the budget also gives you a chance to see where you’re wasting money. In the same way you look back on your personal spending and kick yourself for dropping $150 at Starbucks in a single month, so too do you learn about your business’s bad habits when you review the budget.
If you keep these reviews happening on a regular basis, you shouldn’t have to spend too long on any given day, as most of the numbers will be up-to-date or at least familiar.
While budgets will be adjusted, remember that it’s not really a budget if you adjust every number, every time. As Lindsay Carman of CouponsDaily.com says, “Be open to change, but remember to stick to the revamped budget.”
Finally, look at the budget
Even though you’re going to be reviewing your budget, you need to actually look at it from time to time when thinking about a purchase. How much have you spent this month compared to what you want to spend to hit that profit goal? If you’re close to the line, maybe skip that new monitor for now.
A budget is a living document. You reference it when you make business decisions and you use it to keep yourself in line. Again, automating this whole process with accounting software – even if you’re just tapping into some of the free accounting packages – can help keep you honest.
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