Now that you’ve created a budget and know what to include in it, what are some of the best practices for managing a budget as a small business owner?
These are a few best practices that you can use to manage your business budget.
Set it, evaluate it and reset it
Creating a business budget isn’t a “set-it and forget-it” type of exercise. In fact, it’s dynamic…just like your business. Your business budget should anticipate and account for the highs and lows that are common in entrepreneurship.
As a best practice, you should take the opportunity to reconcile your bank statement each month and evaluate whether or not you are operating within your budget. By building this atomic habit, you will get a better picture into what’s working and what’s not.
And if it’s not working…reset it!
Like I said, your budget can be dynamic. There’s a lot that goes into running your own business and you won’t have all the answers at the start. Perhaps this month, you’ll stumble upon your niche and they’ve tripled your previous sales record! Suddenly, you’re hit with triple the cost of goods sold (COGS). To take this example further, what if this is a recurring pattern that happens at the same time each year?
The last thing we want to do is be hit with the same high costs next year without any preparation.
Set it, evaluate it and reset it!
You need to pay yourself. Beyond your business, you have your own living expenses that need to be taken care of.
Payroll is always something that should be included into your budget, especially if you have employees. If you’re a solopreneur, you may not be in a position to pay yourself the salary you dreamed of just yet, but you still need to make sure you get paid.
A subtle shift in mindset can help you manage your expenses more effectively: consider certain budget categories as recurring fixed costs. For example, let’s say you’ve decided to pay yourself a small monthly salary of $500. In your budget template, you want to note down that $500 as a fixed cost. That means no matter how many units I sell and/or clients I help, I’m paying myself at least $500 each month.
On the other hand, if you pay yourself after all your other expenses, you may find that there’s less than $500 available for you each month.
By dedicating a portion of your budget to your own salary, you can still manage your business expenses while maintaining profit levels.
Build an emergency fund into the budget
On a similar note, you should include an emergency fund as part of your budget. Just like in life, something unexpected can impact your business. In those situations, the best thing we can do is be prepared.
It is recommended to save three to six months worth of expenses or income, whichever is easier. We can think of an emergency fund budget , similar to our salary, consider it a non-negotiable fixed cost to running our business. This ensures that you’re regularly saving money for a “rainy day” without taking away from your profits.
To take this one step further, overestimate your expenses. Budgeting is all about planning and organizing your money. If you have contingency plans for these one-off, emergency moments, then you’re less likely to get caught off guard and scramble to make payments.
It is important to start your budgeting process early. Let’s say you need to buy a new laptop for your business and it’ll cost you around $1500. Perhaps you can’t afford that right now and you know that you don’t want to take out a loan for this purchase.
So you start planning and realistically can dedicate $100 per month towards this new laptop. That will still take you over 15 months to achieve (remember taxes)!
Most business owners forget to consider their timelines when making big purchases. You must remember to account for how long it will take to finance any major purchase. That’s why it’s better to start the budgeting process early to ensure that you’ll be ready to buy anything your business might need.
Use a tracking tool
Your budget is only effective if you track your income and expenses regularly.
Budgeting expert Dave Ramsey claims that writing your budget down on paper gives you power over your expenses. Otherwise, they’ll just be floating around your brain as chaos, which gives them [expenses] power over you.
That’s why we recommend using a tracking tool that allows you to set a budget for each of your major business categories, automatically records every transaction you make and organizes them into the correct categories.
If only there was a tool like that, that exists…
Oh right, we’re building one! Stay tuned!
Find what works best for your spending habits
You’re probably wondering, which budgeting method is best? There are a variety of budgeting methods that you can use and apply to your business however, the most effective budgeting technique is the one that works.
There’s no point setting a line in your budget to stop drinking $5 coffees if Starbucks is part of your daily routine (sorry not sorry, it’s just who we are).
At the end of the day, your budget should help you spend within your comfort level and leave you with the profit levels you’re happy with.