How to Set Up a Business Budget for 2022
The beginning of a new year is the perfect time to review finances and start planning for the next 12 months. If you’re self-employed, one key element that can help you stay on track is developing a business budget. Creating a budget allows you to map out the year ahead, provides accountability, and gives you necessary insights into your business.
2021 brought crazy times with new COVID-19 variants, The Great Resignation, presidential tax restructuring, and many other things that probably affected your business. All the more reason to create and stick close to a business budget.
Here are 5 simple steps for setting up a 2022 budget for your business:
Step 1: Gather paperwork
You’ll want to get your financial statements and documents in order ahead of time to help you in the budgeting process. To start, gather your:
- Profit and Loss statement (income and expenses)
- Balance Sheet (assets and liabilities)
- Bank Statements
Not to worry if you don’t have all of these docs but start where you are, even if it's just with bank and credit card statements. These statements will give you clarity into spending habits and loan liabilities. When you sit down to create a budget, you want the numbers to be based on something realistic, so reviewing the previous year’s numbers is a good start.
If you are a new business owner, you’ll have to project based on industry averages. I suggest connecting with other business owners in a similar field and being open to asking how much others are spending on some expenses that way you are not budgeting unrealistic numbers.
Step 2: Set Revenue Goals
Creating a budget requires taking a hard look at your numbers, specifically revenue. Start by setting achievable revenue goals. Next breakdown those goals by quarter, then month, week, and finally, by day. For example, if you know that in order to meet goals for your business, revenue needs to hit $100,000 this year, then take that number and make it more digestible. That’s $25,000 per quarter, $8.3k per month, $1,923 per week, and $274 per day. If you sell a product that retails at $50 per product you would need to sell 6 of them per day to hit your goal. When you look at your revenue goals that way then it may feel more digestible, and ultimately more achievable.
Step 3: Add the Proper Expense Categories
Creating a comprehensive business budget is all about planning for foreseen and unforeseen expenses. When planning, be specific and break down expenses into detailed categories in order to provide an accurate view. Your business budget should include the following cost categories:
- Fixed costs (marketing and development)
- Variable costs (things like travel and subscription fees)
- Miscellaneous costs (items such as office coffee and new furniture)
From those broader categories, you can break them down into more specific subcategories and allocate a specific dollar amount to each (if possible). Some common budget categories include:
- Software Subscriptions
Step 4: Create the Actual Budget
After you have your financial paperwork from the previous year and have mapped out your expenses, you can go through each category and allocate a dollar amount. The total sum of the budget should be based on projections for this year’s profits as well as your profits from previous years, to try and avoid being in the red.
Your expenses should be based on current prices or estimates. Consider inflation, taxes, etc. to have a buffer. Once you’ve given every category a dollar amount, you have your budget to work with for the year.
Step 5: Tracking and Updating
Tracking your expenses allows you to compare what you actually spent with what was budgeted. Keep in mind, a budget doesn’t have to be a fixed entity, and it can be something you update over time as you gain more clarity and insight into your business needs. Think of it as simply a map for your business spending.
My advice is to analyze your budget at least quarterly, if not monthly (particularly if you are a new business). Think of it this way: it’s better to have an accurate picture of your spending habits and expenses more often than not, because doing so eliminates bad surprises at the end of the year. Having and following a budget can really reduce your stress levels, and help guide your business finances in the new year.