February 14, 2021
A Step-By-Step Guide to Business Budgeting
Budgeting… it’s not the most exciting thing about running a business, but it is so important. It’s actually the foundation of growing a sustainable business. If you’re just starting out, creating a business budget can seem overwhelming. There are so many questions, like:
- How much are you going to need for operating expenses?
- How do you pay yourself?
- What amount do you need to have in reserve for unexpected costs?
- How much do you need to set aside for taxes?
Here’s a secret I wish I had known when I was a new business owner: Without a detailed and accurate budget that allows you to plan your business finances, you are setting yourself up for a long and slow growth curve.
Here’s how you can create a business budget, step-by-step.
First, why a business budget?
The most important thing your business budget will do is inform you about the current state of your finances. For example, it will tell you how much income you’ve generated and the amount (and type) of expenses you’ve accrued over a designated period of time.
It will also help you:
Make informed financial decisions. Like a roadmap, it will pinpoint where you are now financially and provide insight into the path you need to take to reach your financial goals.
Reveal what you’re spending too much on or areas where you need to spend more. To attain profitability, your budget will help you spot the spending excesses and identify opportunities.
Prepare to successfully obtain financing. If you expect to apply for a business loan, you will need a detailed budget as proof of your fiscal responsibility for lenders.
Next, how to create your budget
The easiest way to record income and expenditures is by month. At the end of each month, tally your numbers and see where you stand.
- Write down all of your income sources for the month. If you have a bus
iness that is dependent on seasonal sales or you don’t have a pipeline regularly filled with buyers, your income number may vary widely. Regardless, list all sources of income – product sales, provision of services, subscription fees, income generated by presentations or courses, book sales, anything that brings money into your business.
- Write down all of your fixed expenses for the month. These are routine costs that don’t vary by price – software or subscription fees, rent or lease payments, website hosting.
- Write down all of your variable expenses for the month. These are costs that don’t have a month-to-month fixed price – postage, advertising and marketing, taxes, conferences or seminars.
(A note about expenses: Depending on your business type, expenditures like utilities and payroll may be a fixed or variable expense. To decide which category they best fit in, consider how regularly you pay these costs and how much the costs vary.)
- Add up your income and fixed, and variable expenses for the month. Once you have a list of anticipated income and expenses, write down the dollar amounts for each category. If you’re in the very early stages of your business, you may have to rely on a best guess and then refine the numbers later when you have more definitive data.
- Consistently review and adjust to stay on track. Your business budget is a living document. Designate a time every month when you sit down and compile the actual numbers and compare them to your projection to see where things stand.
At the end of every three months, look at how the quarter went as a whole and analyze how the numbers in each category are trending. Adjust your expenditures if necessary. Do the same thing at the six-month and third-quarter mark. When your end-of-year review comes around, you should have a lot of valuable data that will help you make better business decisions in the new year.
What to include in your business budget
To better visualize how your budget may pan out every month, take a look at this simplified example:
Income:
Product sales: $5,000
Client consultation: $4,000
Webinar presentation: $3,000
Total Income: $12,000
Fixed Expenses:
Web hosting: $20
Software: 30
Insurance: $50
Cell phone: $50
Accounting Services: $60
Total fixed expenses: $210
Variable Expenses:
Postage: $15
Advertising: $150
Marketing: $250
Printing services: $125
Travel and parking: $75
Taxes: $100
Total variable expenses: $715
Your total income of $12,000, subtracted from your total expenses of $925, gives you a total net income of $11,075 for the month.
Budget Tracking Tools
If you’re very early in your business journey, you may not need an accountant – yet. In that case, something as simple as an Excel spreadsheet should suffice to keep track of your income and expenses.
As your business and its complexity grows, but you still want to manage your budget yourself, you can step up to Quicken or QuickBooks.
Keep two things in mind, however:
First, if you begin using business software immediately to track your budget, you will gain a greater comfort level with it more quickly when your numbers are relatively simple to track. You also won’t have to enter a lot of data when you do make the switch to more sophisticated software.
Second, if you expect to hire an accountant to manage your budget as your business grows, data that’s already entered in business software makes that transition so much easier.
Those who budget are more successful than those who don’t
If you’re serious about growing your business, budgeting is the most important step you can take to make an impact.
When I was just starting out in business, I didn’t have a clear plan. If I wanted to buy something to support my business or do some kind of marketing initiative, I just paid for it. I had no dedicated budget for activities to grow my business.
When the expenses were small – just a couple thousand dollars a year – and it made up just a small percentage of my revenue, it seemed like the easiest thing to do. I soon learned that this was an ineffective approach.
Now I track every form of income and expense. Because my business is in a growth phase, I need to know how much I have available to reinvest in business expansion. While there’s no hard and fast rule about what percentage of your revenue you should reinvest, you should dedicate as much money as you can every month into marketing to generate new business.
When you build and maintain a detailed budget, it means you’re running your business like a business. It reduces financial stress, produces more consistent cash flow, and allows you to more confidently plan for growth.
If you’re eager to create a thriving business and prosperous future, business budgeting is your pathway to success!
Do you have questions about how you can succeed in your business and accelerate your journey toward reaching your goals? I invite you to learn more about From Startup to Success coaching packages. Begin with a no-cost 30-minute consultation to discuss where you are with your business.
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