So you’ve decided to create a budget for your small business, but you don’t know where to start.
No problem, we’re here to help!
A budget should act as a guide for your long-term business plan. That’s why when you’re creating a budget for your business, you should include everything related to your income and expenses, then organize them into major business categories.
Let’s start with your income. In this step, you need to take into account all of the ways you make money in your business, i.e. sales and revenue. If you’re creating a monthly budget then you need to track all of your income sources that come in each month from regular business operations.
For freelancers and service-based businesses, that’s all the revenue you’ve collected from your clients and/or projects in a month. For e-commerce, this will be your total sales. If you charge a monthly retainer, include that as well.
Some of you may have experienced that some months are busier than others. That’s perfect, write that down!
As you get more comfortable with this budgeting exercise, you want to create a budget for each month. This will help you plan for seasonal highs and lows in your business. For example, if you’re an e-commerce store, November may be one of your highest selling months because of Black Friday and Cyber Monday.
Your income may vary month-to-month, but it’s important to note down, even if it’s just an estimate, how much you are likely to earn. This will help with the next part, tracking your expenses.
For some businesses, you may have non-operating income, i.e. the revenue you earn from activities not related to your core business operations. This can include dividends as well as any gains from investments. If you’re just starting your business, you’re unlikely to have this source of income. So let’s track expenses instead.
You’ve probably heard the term, “you need to spend money to make money.” Well, that’s true. These are your business’ expenses. It’s what your business spends money on so that you can properly offer your products and/or services to your customers.
There are two main types of expenses: fixed costs and variable expenses (also referred to as variable costs).
Your fixed costs are expenses that have the same value, regardless of how much revenue you make, that’s why they’re called “fixed.” Some common fixed costs include: rent, internet, phone, bank fees, insurance, subscriptions, etc.
You can anticipate that fixed costs will not change each month (unless there has been a rate change). Therefore, we can plan for a dedicated portion of your budget to cover our fixed costs for each month. No matter how much revenue we bring in, we know exactly how much of that income will be set aside for our fixed costs.
Variable Expenses (Costs)
Variable expenses aka variable costs, are the types of expenses that will change each month depending on how many products and/or services you sell. This expense type is harder to track since it’s directly correlated with your business activity. However, the more we track our variable expenses the more accurate our budget can be.
An important term to know here is Cost of Goods Sold (COGS), i.e. the total cost of making a product or service. For physical products, this includes anything it takes to make the product: materials, production costs, shipping to your business address, etc. For service-based businesses, this is a little trickier to calculate. Instead, you need to look at all the other variable expenses in our business.
Some common variable expenses include: marketing (ads), office supplies, packaging, shipping, travel (gas), meals/entertainment (coffee counts), transaction fees, etc.
There may be other variable expenses that your business incurs. It is important to note them all down so that you can properly categorize them in the next step.
Sometimes our business needs that one-time big purchase: a new computer, production equipment, furniture, renovation for a meditation room (super necessary), emergency funds, etc. Although these expenses are technically variable, they’re not likely to occur each month. We should use this category, non-recurring expenses, to help us track our spending to ensure that we are within our budget.
Pro tip: If you are going to make a big purchase, start saving earlier and plan that into your budget.
Business expense categories
Now that you’ve tracked all of your expenses, you can start to see some common categories/themes in your spending. If you notice that two transactions revolve around the same theme, you can create an expense category for them. Now, add up all the expenses in each category to determine its total value.
Some common business expense categories include: rent, marketing, office supplies, utilities, internet, travel, meals and entertainment, just to name a few.
This total amount can serve as your first draft budget for this specific expense category. Now repeat this process for the remaining expenses.
Putting it all together: How to budget business expenses
Now that you’ve tracked your income and expenses, it’s time to create your business budget.
By evaluating your expenses and separating them into relevant business categories, you can see exactly how much you are spending in each business area. It’s not guesswork either, your budget is supported by real data from your business.
Now, compare this to your total income and evaluate the results. Some questions to ask yourself when looking at the numbers are:
- Are you spending more than you’re earning?
- Which business categories are you spending the most in?
- Are these expenses fixed costs or variable?
- Do I really need to be spending this much in this area? Are these categories part of my core business operations?
- Will I earn more revenue if I increase my budget in this business category?
These are just some guiding questions for you as you start to work with your budget.
An important reminder, a budget is there to guide your business’ financial planning. As such, you want to make sure that you are not spending more than you’re earning each month.
Wrapping it up
An important thing to remember is that your budget is not a “set-it and forget it” type of exercise. Rather, you should take the opportunity to reconcile your bank statement each month and double-check that you are operating within the budget you just created.
Checking your budget each month will also help you identify any seasonality patterns in your business. This will help you better plan for these time periods to ensure your business remains profitable.