Budgeting for business: Tips for beginners
As a new business owner, there’s a lot of terrain you have to navigate. Having a budget can be like a compass that gives you a guiding direction when it’s time to make important decisions about your business. Creating a budget isn’t always easy, especially when you’re just starting out, but it can be a major component in the success of your business.
Managing money as a business owner is vital. A recent study by CBInsights found that the number one reason businesses closed their doors was that they ran out of money. Of course, factors outside a business owner’s control can affect this. However, having a budget can help to preserve the finite resource of cash.
Building a detailed budget takes another resource: time. Many business owners are intimidated by the thought of establishing a budget. Not only is it time-consuming when they already have so much to do, but the task is daunting. Where do they begin?
Knowing the goal is a great place to start. You want a budget that will be simple to use but also adaptable. You need to build in flexibility if circumstances change, but the core of your system should be easy to follow. One strategy for building a business budget like this is to break it down into more manageable steps. For beginners, starting fresh can be an excellent opportunity to set you and your business up for success.
Step #1 - To spreadsheet or not to spreadsheet
One way or another, you’ll want to keep track of your budget. Logging your financial goals will give you accountability and help you stay on track. Fortunately, you can choose from a broad array of options to suit your circumstances and personal work style.
An old-school paper budget works well enough. Many professionals still strongly advise using spreadsheets for your business budget. With proper setup, these can be tailored with formulas to adapt to the changing scenarios that might affect your budget. There are lots of budgeting software you can use on your computer and apps for your phone if you’re constantly on the go.
Step #2 - Tally up the income streams
Accounting for all the revenue sources coming into your business is a key first step in any budget. When calculating your business’s monthly income, you should find the total revenue, not the profit. This accounts for all the money coming into your business before any expenses.
After you have tallied up all of the income streams for your business, calculate the monthly average. Ideally, you want to be able to look at your revenue stream over a period of at least twelve months. This will give you enough data to calculate a monthly average and see a full year of income, potentially with any seasonal factors. If you haven’t been in business at least a year, you’ll have to estimate. If this is the case, don’t write your number while wearing rosy shades; be realistic. If anything, be conservative in your estimates.
Step #3 - Consider the fixed costs
Once you’ve tallied up the money coming into your business, it’s time to start accounting for what will be going out. The first type of expense to consider is fixed costs. Fixed costs are recurring weekly, monthly, or yearly and are necessary to run your business.
Sometimes referred to as “overhead cost,” these are the expenses that don’t change and generally must be paid. You can take inventory of your bills or bank statements to find these, but there are some typical examples:
- Loan payments
- Insurance premiums
Depending upon your specific industry, you may have these or other fixed expenses. A recent Bureau of Labor Statistics release included a list of other fixed cost examples.
| The number one reason businesses fail is running out of money. Setting up a budget could help set your business up for success.
Step #4 - What are the variable costs
Just as fixed costs don’t change, on the other side of the coin, variable costs do. These costs are affected by use, and many are necessary for your business. For example, utilities are often a variable expense. You may use more electricity for climate control in your office during certain seasons of the year, which could affect the amount you’ll pay on your utility bill.
Other variable expenses are “nice to have” services. These have an essential function and may improve your business, but in a pinch, they could be reduced to cut costs. Examples of these “discretionary expenses” might include the following:
- Professional development
- Marketing costs
- Office supplies
- Owner’s salary
- Replacing old equipment
Building flexibility into your budget is important. The adage of some financial advisors is “estimate income low, estimate expenses high.” Don’t rely on your variable costs as the only means of wiggle room. However, if times get lean, lowering your variable expenses by reducing discretionary spending may be a good way to get by until the business can become more profitable once again.
Step #5 - Have a backup plan
If there’s one thing you should expect, it’s the unexpected. There are some one-time expenses you can probably anticipate. You may have been prepared to make major equipment and furniture purchases when you launched your business. However, there are some costs you probably won’t see coming. If you’ve been running your restaurant smoothly for a few years, you might not anticipate your walk-in refrigerator giving out two days after its warranty expires.
The best thing you can do when unexpected expenses arise is to be prepared for them. Of course, this is easier said than done. However, when building your budget, it’s important to make space for savings so you will have extra cash on hand. Having a contingency savings account could save you when you need it most. How much money you’ll want will vary depending upon you and your business, but some business owners aim to have between six and twelve months of fix operating costs on hand.
Step #6 - Draw your map and follow it
To start your budget, you’ve listed your expenses and income and created a plan to build savings. Now it’s a matter of putting it all together. This gives you some idea of what your cash flow should be month to month.
Also, as you move through the year, you’ll be able to check your actual number against what you’ve planned out based on your expenses, anticipated income, and the savings goals you’ve set. If the numbers aren’t matching up, you’ll be able to take action quickly to correct course and move forward in a better direction.
Don’t go it alone
Finally, once you’ve put it together, it can help to have a bit of backup. Solid bookkeeping practices are a good place to start. There are several options you customize for your business and circumstances. If you'd like to learn more about tracking your business’s finances, check out ComplYant’s free webinar, Bookkeeping and Accounting Secrets for Small Business Owners.
You’ll also want to be sure you’re keeping track of your taxes, business licenses, and other filings that can sneak up on you. Late fees and penalties are avoidable expenses, so sign up for ComplYant for free to be sure you never miss a deadline.