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.
Here are 5 simple steps for setting up your 2021 budget:
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)
These statements will give you clarity into your 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 ask how much others are spending on some expenses that way you are not budgeting unrealistic numbers.
Step 2: Take a detailed look at the numbers
Creating a budget requires taking a hard look at your numbers and where your business is at currently. Your P&L (profit and loss statement) can show you three important numbers that are the lifeblood of your business: revenue, expenses, and profits.
When creating a budget, you need to look at those three numbers and plan for the future. Do you anticipate your revenue taking a hit? Or do you believe your income will increase or stay the same? Consider the political and economic climate, as well as anything seasonal that could affect your business. Furthermore, are you planning for any major expenses this year? For example, maybe you’re moving into a new office space this year or need to purchase new computer equipment. All of these things should be considered when crafting a business budget.
Step 3: Add the proper 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:
- Estimated revenue for the year (what you project to make)
- Fixed costs (expenses you know will be part of your business)
- 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:
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. Budgets can change over time, and help guide your business finances in the new year.