Starting a business is an exciting adventure that often feels like a plunge into the unknown. While you get to watch your dreams unfold right before your eyes, you may also be swimming in a to-do list that can often be so overwhelming that some of those pesky tasks keep getting pushed off until the next month…and the next….and the next.
Studies have shown that one task that commonly gets pushed to the wayside is creating a business budget. Getting up close and personal with your finances can be intimidating, time-consuming, scary, and sometimes – dare we say – boring. This has led to many business owners that are unsure whether or not they are turning a profit. So if you are one of those business owners, are on the road to becoming one, or just came across the article and decided to learn just in case, we are here to put you
So why is it so important to create a business budget, how do you begin, and can you realistically maintain it? We answer all those questions for you here, because the more you know about your business budget, the more confident you can be as you glide through the rewarding life of an entrepreneur.
It’s important to note here that one size does not fit all, so take what you need from our advice and tailor it to your needs.
Why are business budgets important?
Business budgets can help you keep track of your finances during busy months, slow months, and the months in-between. During the months when business is booming, you might be less incentivized to work on a budget, since it looks like you have money in the bank that won’t be going anywhere any time soon. However, these months are often balanced by slow months, those dreaded periods when you’re barely breaking even, or worse.
Keeping a budget can help you steer clear of the dreaded D word. You are more likely to remain debt-free if you know how much money you have to spend, and you’ll be able to prepare for those hard times more efficiently by knowing how much money you have in advance.
Regularly monitoring your budget will help you predict what your future will look like, including monthly and yearly trends, what expenses are okay to cut at certain times of year, and when to stock up on extra inventory. Knowledge is power, and the more you know about the financial patterns of your business, the more potential you have for business longevity and success.
So, how do you begin?
- DETERMINE INCOME
There are many ways to begin a budget, but we recommend starting with listing all of your income sources. Make a note of which amounts are fixed (income that does not change month-to-month), which amounts are steady(income that does not change much between months), and amounts that are sporadic (changing drastically between months). You may want to do this for the last few months, too, so you can determine any patterns or outliers in your revenue. Add up all of your income sources for each month and see how much they differ.
- DETERMINE FIXED COST
Next, make a list of all your costs. We recommend starting with fixed costs, or costs that do not change between months. These can be your rent, employee salary, insurance bill, taxes, subscriptions, and anything else that remains steady between months. Add these up for each month to determine your monthly fixed cost total
- SUBTRACT FIXED COST FROM INCOME
When you have your fixed costs added, subtract it from your monthly income.
- ADD UP VARIABLE COSTS
Now, look at any costs each month that are not fixed. Maybe you had a plumbing issue last month that took a chunk of change, or had to buy a more inventory that normal because of a surge of business you had. Variable costs can also be items such as supplies, electricity bill, or that Facebook post you paid to boost last week.
- SUBTRACT VARIABLE COSTS FROM YOUR INCOME
After you have subtracted your fixed cost from your income, subtract your variable costs from that new total If your remaining total is positive, that is your profit for that month. Now, if your total becomes a negative number, that means instead of a profit, you had a loss for that month. If you find that you are getting more losses than profits, don’t fret! This is not uncommon, and it’s not the end of the world. Now that you know, you can create an action plan by cutting costs or brainstorming ways to generate more revenue!
How Do I Maintain My Budget?
So you created your budget. Now comes the hard part – setting aside time each week to maintain it. We recommend choosing a day each month – whether it’s the first day of the month, the first Sunday of the month, or any other monthly day that appeals to you. Grab a cup of coffee and your favorite snack and lay out your budget for the last month. Then, compare it with the months before. Are there any patterns you see? Are there any expenses you need to be on the lookout for in the coming month? Write down your expected profit for the month ahead, and don’t be discouraged if you don’t meet it – there’s always next month!
Now, go make that budget!