Budgeting is all about creating a plan to spend your hard-earned money wisely. But, that’s only the tip of the iceberg. Beyond the surface, budgeting is also about understanding and evaluating your relationship with money.
As small business owners, you work hard for your dollars. It doesn’t matter what services or products you sell. The end goal is the same: we need to track, plan and make sure that every dollar of our income is being spent the right way. And, if we spend less than we earn, then we can do a lot more than just save for a rainy day. We can finally invest in activities that will help our business grow. And as a business owner, rainy days or even seasons, are in inevitable.
Small Business Budgeting Techniques
Budgets are much more than just paying your bills and expenses on time each month. Creating the right budget helps you determine how much you should be spending, and on what.
All budgets consider the same main things:
Income: How much money your business makes
Expenses: How much your business spends
However, we understand that every business is unique. Your expenses, i.e. how much you spend on what will be vastly different from another small business. Even if you are in the same industry, your business goals, marketing, relationships, and strategy are different.
The way you manage your budget will be different as well.
That’s why we’ve compiled a list of small business budgeting techniques to help you track your income and expenses with ease and grow your business.
Read through the techniques, discover what works for you, and adjust as needed.
The Dave Ramsey Envelope System
The idea of the Dave Ramsey envelope system is to create separate cash envelopes for each budget category you spend money on.
You start by taking regular envelopes, labeling a business category on each one, and assigning a specific dollar to them. You will then fill each envelope with their assigned dollar amount using physical cash. The idea is to only use the cash in the envelope to purchase things for that category.
With a ‘system’ like cash envelopes in place, it’s much easier to stay on track toward your budgeting goals. It also makes it harder to overspend. By using physical cash envelopes for each budget category, you will see the size of your envelope decrease as you spend more. This a nice physical reminder to stay within your budget.
Budgeting is all about knowing where each and every dollar is, and then making a plan for where you want it to go.
The 50/30/20 rule is all about letting you do just that.
It’s a framework that divides your income into three main categories.
Yeah, you guessed it:
Essentials (50 percent)
Wants (30 percent)
Savings (20 percent)
The rule of thumb is to set aside no more than half of your income for business necessities. This includes your fixed costs and variable expenses, such as rent, meals/entertainment, Cost of Goods Sold (COGS), Internet, transportation, and utility bills.
When it comes to ‘wants’, the second category of this budgeting rule is aimed at you to set aside cash for discretionary costs. Every business’s wants are different, so this 30 percent rule is meant to help you know how much to budget, rather than what to spend your money on. The main purpose of this budget category is to start saving as a business owner. That’s why it’s recommended to immediately put away 20% of your income. You may need it for a “rainy day” or that “big purchase” that will expand your business.
Pro Tip: Use these percentages as a guide. Your business needs will vary and there may be seasonal times when you can save more and/or afford more of your “wants.”
Rich Dad Poor Dad
One of the most famous books on personal finance of all time is, *Rich Dad Poor Dad* which shaped Robert Kiyosaki’s view growing up on money and investing by learning from both his real father (poor dad) and the father of his best friend (rich dad). With six key lessons throughout the book, Robert raises the concern that the greatest wealth anyone has is on financial literacy. With financial education, many of us won’t end up broke, because we know how much and where to put each dollar that we earn.
Rich Dad’s Financial Statement template is offered online and can be used for your budgeting purposes. Kiyosaki breaks down an individual’s common expense categories into a ready-to-use template. However, this template is more catered to the individual. In most cases, your small business may not have these expense categories in your day-to-day operations.
Zero-Based budgeting is a technique where everything comes down to giving each dollar a “job.” In other words, every dollar that you have available in your budget should be assigned to an expense category: internet, rent, utilities, marketing, equipment, travel, savings, etc.
This is a popular budgeting technique used by other budgeting apps like YNAB (You Need a Budget). In fact, even Dave Ramsey’s Envelope System applies the same principles but with physical cash.
While using this technique, you will start to notice the “true” expenses of your small business. Don’t be afraid of what you see. Overspending in one category doesn’t necessarily mean you’re losing money. Instead this technique will give you a better understanding of your spending habits in one category and allow you to “borrow” money from other categories to fund those habits.
But, why is it called zero-based budgeting?
By assigning all of your income into specific budget categories until there is no money left over, you essentially sit with a zero-based budget because your business income minus your total expenditures equals to zero!
The 10-10-10 rule was invented by business writer Suzy Welch and was created as a decision-making framework for spending. Before making any financial decision, pause and ask yourself three key questions: the 10-10-10 rule says that before making any decision, take time to ask yourself three questions:
How will we feel about it 10 minutes from now?
How about 10 weeks from now?
How about 10 years from now?
Unlike other small business budgeting techniques, this rule is all about pause and discipline to combat impulse purchases. According to Welch, the first 10 minutes is a pause button. If the expense is still weighing on your mind after 10 minutes, the next 10s can be brought to the fore to weigh in if whatever you want to purchase will actually hold value over time or if it makes long-term financial sense. The entire point of the 10-10-10 exercise is to trick yourself psychologically with a set of questions before making the dive.
Revenue budgeting is a technique that helps you create a budget based on how much you expect to make. It’s a forecasted approach.
Basically, we start by asking ourselves, how much do we want and/or expect to make this month? What is our revenue goal for the month? However, it can be any time period really.
Then, working backwards, how much would it cost in expenses to reach that level of revenue?
The key to revenue budgeting comes at the end of the month. You will need to accurately track how close you were to your budgeting goals. Actually, you have to do this for every budgeting technique. The main difference here is that you’re starting off with a prediction and then looking at historical data to monitor how close you were. This is a great method for small businesses just starting out or having enough insights to run “experiments” to grow their business.
We understand that the most important part of any budgeting technique is tracking your income and expenses. This is why we built our template with the most common income and expense categories that businesses typically have.
All you need to do is input your values for each category and right away, you’ll be able to see how much money is coming in and going out.
Learn how to use our TrulySmall budget template for your small business.
Choose a budgeting technique and get started today
As a business owner, rainy days, or even seasons, are in inevitable. As a result, we need to understand the fundamentals of budgeting and apply it to our businesses, just like we would for our personal finances.
As you can tell, the theme across most of the budgeting techniques is the same. Whether it’s the envelope system, zero-based budget, or the 10-10-10 rule, budgeting techniques are frameworks that help you give every dollar you earn a job.
The key to doing this successfully is all about tracking where each dollar of your income goes and assigning each dollar to a specific budget category. When you get really good at budgeting, you can even begin to start creating budget goals for yourself. This means that you’ve not only ‘aged’ your money, but you can begin planning much further ahead on activities that require business capital. These types of activities are the ones that will ultimately grow your business.