Managing money is crucial for any business, especially small ones. For those just starting, it’s essential to plan and track your spending wisely. By keeping an eye on your costs and expected earnings, you can make smart choices that help your business grow in the long run.
This article will share important tips for small business budgeting to ensure your finances are in good shape for success.
Why Your Small Business Should Have a Budget
Having a budget is really important for small businesses, especially when they’re just starting out. It gives you a detailed picture of how your company’s money will look in the future. This way, you can make smart decisions that will help your business succeed in the long run.
Creating a budget for your business also helps you to:
1. Find ways to make more money
2. Avoid going into debt when business is slow
3. Cut down on unnecessary spending
4. Keep your finances organized for potential loans or investors
5. Use extra money to help your business grow
6. Learn about where you’re spending money and how you can grow
7. Make sure your business is making a profit
Here’s a simple guide on how to create a budget for your small business in seven steps:
Step 1: Add up all the money you make.
Let’s start with the basics: figuring out your budget begins with knowing how much money you can spend. Many small business owners make a big mistake by not keeping a close eye on this.
If your business has one main way of making money, like selling things online, it’s easy to figure out – just look at the money you make from sales. But for other types of businesses, you might need to look more carefully.
For instance, if you have multiple locations or sources of income, you need to keep track of all of them. Different ways you make money could include:
1. Sales from events, like trade shows
2. Sales from different places, like physical stores
3. Money from freelance or side projects
4. Fees from consulting work
As you figure this out, look back at the past year to see how much money you usually make, especially if your business has busy and slow times. If your business is brand new, make a modest guess so you don’t end up with less money than you need.
Step 2: Figure out your fixed costs
Fixed costs are the regular, predictable expenses your business has on a regular basis – whether it’s every week, month, or year. If you use accounting software, it can be helpful to check past records to see these regular payments.
Here are some examples of fixed costs:
1. Rent for your office or store and equipment
2. Supplies that you regularly need to restock
3. Business insurance, loan payments, and taxes
4. Payroll and benefits for salaried employees
5. Internet and phone service
6. Hosting service for your website
7. Software subscriptions, memberships, and tools with a monthly fee
Step 3. Remember the Costs That Can Change
Variable costs are similar to fixed costs, but the amount of money you spend on them can vary each month. Keeping track of these costs can be a bit more challenging, so it’s important to pay attention.
Here are some examples of variable expenses:
1. Materials for making your products, which can change depending on how much you produce
2. Shipping and delivery expenses, which can go up or down based on how much you sell
3. Utilities for your office or store
4. Workers who aren’t on a fixed salary, like part-timers or freelancers without a set monthly pay
5. Marketing expenses (although these might be set if you have a fixed plan or hire an agency)
6. Travel costs for events, meetings, and such
7. Other expenses, like training and professional development
Variable costs are important in managing a small business budget, especially if you’re trying to save money. When you need to cut costs, it’s a good idea to take a close look at these expenses first.
Step 4. Plan for Rare Expenses
These are costs that don’t happen often but can surprise you and mess up your business budget. Think about things you don’t buy regularly but still need to buy.
It could be big things like machinery or laptops, or smaller things like label makers. These are not everyday purchases, but when you have to buy them, the unexpected costs can hurt your business budget a lot.
Especially if these purchases are crucial for running your business every day.
Step 5. Save for Emergencies
It’s important to budget for unexpected costs. What if your equipment breaks or there’s an accident? Having money set aside for these situations can help you deal with stress and keep your finances stable.
Even if you can’t have a special emergency fund, there are options like Shopify Capital’s small business funding. But having a reliable emergency fund gives you extra protection and peace of mind.
Step 6. See if You’re Making a Profit
After listing all your money coming in and going out, do the math to find your profit.
First, add up all the money your business makes. Then add up all your costs, including things that always cost the same, things that change, and things you only pay for once. Now, take away your total costs from your total money earned to see if you made any profit.
Here’s an example:
- – Internet: $65
- – Insurance: $100
- – Office supplies: $30
- – Software subscription: $50
- – Utilities: $80
- Total fixed costs: $325
- – Freelancer wages: $800
- – Travel and entertainment: $150
- – Marketing and advertising: $400
- – Raw materials: $600
- – Shipping and logistics: $200
- Total variable expenses: $2,150
- – Equipment upgrade: $300
- – Professional training: $250
- – Website development: $500
- Total one-time expenses: $1,050
- Total expenses: $3,525
Total income ($6,000) – Total expenses ($3,525) = Total net income ($2,475)
If your business made money, look at your budget to find ways to make your business better. If you lost money, stay positive. Not all small businesses make money all the time. Instead of worrying, find ways to improve and focus on making more money.
Step 7. Plan for the Future
Now that you know how your business is doing, think about the future. You can’t predict exactly how much money you’ll make or spend, but looking at past data helps you make good guesses.
Make a budget for the future based on the profit and loss statement you made earlier. Include all the money you’ll earn and spend. Also, think about when you might need to buy new things or fix your equipment and set money aside for that.
Start doing this regularly, and it’ll become a habit.
If you’re new to budgeting for your business, it might seem like a lot. But it’s really important for small businesses to know how much money is coming in and going out. When you know this, you can make smart decisions and plan for the future. This helps your business grow, even when things get a bit crazy.
What should be in a business budget?
A business budget should include money you expect to get, like investments or salaries. It should also include everything you spend money on, like rent, insurance, salaries, and utilities. Don’t forget important things like marketing, taxes, and fees.
What are different ways to make a budget?
– Incremental budgeting: Adjusts last year’s budget for things like inflation and sales.
– Activity-based budgeting: Allocates money based on activities that are most important for the business.
– Zero-based budgeting: Starts from scratch each year, justifying every expense.
– Rolling budget: Regularly updates the budget to fit changing business conditions.
What are the key parts of a budget?
– Income: Money from investments, wages, and benefits.
– Savings: Money for future goals like education or retirement.
– Expenses: Money set aside for future goals like education or retirement.
– Debt: Money owed from loans and other financial obligations.
– Emergency fund: Money saved for unexpected expenses like medical bills or car repairs.
What is the 50/20/30 budget rule?
The 50/20/30 rule suggests allocating 50% of income for essential expenses, 20% for financial goals, and 30% for lifestyle expenses like entertainment.