The word “budget” is often a scary word to small business owners, but it shouldn’t be. A budget helps you keep track of your business’ financial goals. Simple as that. Whether you’re saving up to purchase new equipment, working towards becoming debt-free, or even just starting your entrepreneurship journey, a budget is necessary to help with your planning.
Why you need a small business budget
Building a budget must align with your long-term business plan, i.e. what are your goals for your business and then how much money do you need to get there? It’s about making an educated guess to what your business’ future will look like using the amounts of historical and projected income and expenses.
In addition, your budget will be something you refer to monthly to make sure that you are spending in the right areas of your small business. For example, from your budget you may notice that there are certain months where you spend more than usual. This information can help you prepare for those busy periods and indicate that you may need to save earlier on in order to turn a profit in that month.
Step 1: Determine your monthly revenue
How much money do you make each month? This is your monthly revenue.
In order to understand how much you can spend, you must first understand how much money is coming into your business each month.
If you have a monthly retainer with certain clients, this will be easier to calculate. However, if you sell products or services this will likely vary each month. Additionally, your business may have multiple sources of revenue, i.e. different clients, products, services, etc. It is important to track all of these as well.
Add together all of your income sources to find your past monthly revenue. Do this again for the rest of the year and this will help give you an overview of which months are busiest to plan for when you might need to increase your marketing budget or consider hiring seasonal help.
Step 2: Determine your monthly expenses
Your expenses typically come in two forms: fixed costs and variable costs.
Fixed costs are the ones that don’t change from month-to-month, they’ll always be there. Some examples of fixed costs for small business include: rent, internet, domain and software subscriptions, wages and car insurance, among many others.
Variable costs on the other hand will differ each month depending on your business activity, seasonality and other external factors. Some variable costs will be the quantity and cost of materials, gas, sales taxes, utilities, equipment purchases, etc.
Variable costs also include one-off purchases and impulse buys. Although they may not happen often (hopefully) it is important to include this category in your budget planning. In fact, taking control of your variable costs is one of the most important and easiest ways to manage your spending each month.
Step 3: Build an emergency fund into your budget
Life doesn’t always turn out how we expect it to. The best thing we can do in those scenarios is be prepared. Just like in life, something unexpected can impact our business in a certain month. Maybe you had to pay for express shipping on more orders than you expected or your laptop needs to be replaced.
Whatever it may be, it’s best to have some money set aside for those worst-case scenarios. For retail stores, it’s typical to include a “theft” category for the month.
By building this emergency fund into your budget, you will be prepared for those one-off events without eating too far into your profits.
Pro Tip: Include a certain $ amount in your fixed cost section of your budget, e.g. $100 per month. This ensures that you’re regularly saving money for a “rainy day” without taking away from your monthly profits.
Step 4: Categorize all income and expenses
Once you have all your income sources and expenses written in your budget, it’s time to categorize them.
We can typically organize items into common business categories including:
- Bank Fees
- Cost of Goods Sold
There may be other categories that your business needs to record so be sure to note those down too.
Here is where the TrulySmall Accounting app really helps! All of the financial information can be downloaded seamlessly from your bank and into your line items for income and expenses; you can also add and adjust entries manually. Your TrulySmall business dashboard gives you a quick overview of your business finances and your business statements.
Step 5: Evaluate your reports (Profit & Loss)
Now that you’ve recorded your income and expenses it’s important to see if your business is profitable. As a small business owner, you should regularly evaluate your reports, particularly your Profit & Loss (P&L) statements. This statement shows your business’ income, expenditures and profitability over a certain period of time. You can evaluate your business’ profitability at a monthly, quarterly and annual level.
With all your income and expenses categorized, you can clearly see which areas of your business you’re spending too much money in and/or which areas need more budget.
Pro Tip: If you have an accountant, share your Profit & Loss statement with them for additional feedback on how/where you can optimize your budget.
Step 6: Stay on Track
Now that your budget is set up and you have all of your financial records organized in your online small business accounting software, you can easily and regularly monitor your income and expenses to stay on track with your business budget!
Tools like TrulySmall Accounting make the budgeting process easier for small businesses. When you connect your bank to TSA you will get a seamless integration that will display all your transactions in real-time. This will help you keep an accurate, real-time record of your revenue and expenses for easier business planning.
Pro tip: Re-evaluate your budget each month
We recommend re-evaluating your budget each month. For one, it’s a good financial habit to create. Additionally, it can help identify seasonality effects in your industry. For example, you may find that you had an increase in revenue in certain months. In that case, it may be worth allocating more money to a marketing budget to account for those high traffic periods.
Every business and industry will differ, but it’s important to start the habit now to ensure that you’re sticking to your budget.
Wrapping it up
A small business budget will help you identify when you’re profitable and where you can “trim some of the fat.” As you go through this exercise, it’s important to use actual numbers from your business. Even if they’re not complete, use a rounded up version. You may surprise yourself when you come to the actual numbers at the end of the month.
Lastly, remember to categorize your expenses and build in a little cushion room for each category. Some months may be more demanding than others or an upcoming sale is closing. Whatever the case is, you want to be able to work within your budget comfortably without compromising on your business operations.