Most entrepreneurs go into business because they’re passionate about their product or service. But, as a small business owner, you have to wear a lot of hats and develop management skills to ensure that your business continues to thrive and grow. You won’t always get to focus all your time and energy on just the bits you’re passionate about.
You’ll also have to make time and space for routine and foundational tasks like inventory, administration, and budgeting. Without these practical underpinnings, your business won’t stay in business for very long.
And while the saying “you need to spend money to make money” is certainly true, this doesn’t mean you should throw money at every issue or event.
One step that many entrepreneurs overlook–to their detriment–is budgeting for their small business. If you haven’t launched your business yet, a budget and financial plan should be included in your business plan.
How will you finance costs like inventory ordering, postage to ship your products, or rent for a storefront? If you’re a sole proprietor or starting an online service from home, how will you plan and pay for the purchase of specialty equipment, design software, accounting software, or office supplies?
From startup costs to everyday operating costs, make sure you have a solid understanding of the financial requirements to run your business. After you’ve laid that foundation, budgets usually only need to be updated once a year–although you should be checking in monthly.
If numbers make your head hurt, or if you’re just not sure where to start, check out our tips below for creating a useful and comprehensive budget for your small business.
Tips for Budgeting for Small Business
To build a stable and thriving company, you’ll need to learn how to establish a budget for your business. Following these simple steps will help you get started.
#1 Understand Where You Stand
A thorough financial analysis is always the first step when you’re looking to build or revamp your budget. You need to understand both where your money is coming from (your income) and where your money is going (your expenses).
A budget is just a map of your income and expenses that allows you to ensure you’re making a profit and handling your money wisely.
If you’ve been in business for at least a year, you can simply review your financials for the last year to help you build a realistic budget. If you’re a prospective entrepreneur, you’ll have to be a little more creative and use numbers from projections based on market research and your current financial situation.
#2 Review Your Revenue
After you have a foundation to build on, it’s time to focus on your revenue streams. How much revenue do you bring in in a given year? How does your revenue rise and fall each month?
This is important information to understand because many businesses experience seasonal fluctuations. In retail, for instance, a boom around the Christmas shopping season is followed by a corresponding lull in January and February.
If you can recognize trends in revenue, you can prepare for lean times by setting aside extra money for expenses when you’re flush with cash. This kind of information can also help you decide when to hire new employees, when to take on new clients, and when to cut back on certain kinds of marketing.
For instance, the Small Business Administration suggests that the average marketing budget for small businesses should be about 7-8% of your gross revenue if you make less than $5 million. Knowing your revenue numbers can help you decide how much you’re able to spend on advertising.
#3 List Out Your Fixed Expenses
The next step in your budget will be listing out your fixed expenses. Fixed expenses are your regular monthly expenses, such as:
- Rent
- Payroll
- Utilities
- Insurance Payments
- Monthly Subscriptions/Services
- Lease Payments
List all of your fixed expenses and add up the totals. The sum is the absolute bare minimum that you need to make to stay in business. Compare your expenses to your revenue for a quick health check on your business.
If your fixed expenses exceed your revenue, you need to cut back on your expenses or drum up some more business stat. If your revenue exceeds your fixed expenses, you’re headed in the right direction.
#4 Consider Variable Expenses
Unfortunately, budgeting–like life–isn’t always black and white. If your equipment breaks down unexpectedly, you’ll have to find a way to pay to have it repaired or replaced. If you have a sudden influx of orders, you’ll have to allocate more of your budget to packaging and shipping. If someone on your team falls ill, you may need to hire a temp to help out.
Variable expenses are, by their nature, unpredictable. But you can still plan for them in your budget to keep you from being blindsided.
Not sure how much to allocate? Try this exercise: Imagine that everything has gone wrong. Your office manager is too sick to work, your point-of-sale system is on the fritz, you accidentally double-ordered your inventory, and insurance premiums went up by 20%. How much would it cost to cover all of that?
Remember, this is just an exercise, but sometimes trouble tends to come all at once. And it’s always better to be over-prepared than under-prepared, so be generous when you’re factoring in variable expenses.
#5 Choose a Budget Format
If possible, create your budget inside your accounting software. QuickBooks and other accounting programs often allow you to connect your budget to your invoicing and expense keeping, so you see budget updates in real time.
You can also create a perfectly serviceable budget in a spreadsheet.
There are many different types of budget tools, but the two most common are income statements and cash flow statements. If you are running an established small business, you’ll likely use both to track your revenue and expenditures.
If you have been running your business for a year or less, you can start out by focusing on the cash flow.
Talk to the ASBTDC for Help Budgeting for Small Business
If you still have questions about how to make a budget for a small business, or you’re struggling with certain financial topics, contact the Arkansas Small Business Technology Development Center.
We’ll help perform a financial analysis and walk you through how to set your budget, maximize profits, and manage your cash flow.