I’m surprised you’re actually reading this! Most small business owners don’t want anything to do with accounting or business budgeting. Heck, most people don’t even do budgets for their personal lives so why would they do one for their business?
Kudos to you for reading!
Truth is, a budget is a very important tool for your business. You won’t know a single thing about how things are really going without the financials to review. It could feel like everything is going great when in reality you’re losing buckets of money and on the brink of collapse.
We’ve seen and heard this over and over again. Small business owners often tell us how great everything is going and how busy they are. ‘We’re hiring people like crazy and can’t keep up with the demand!’ That must mean everything’s going great and the business is turning a handsome profit. This is almost always not the case. Usually they’re so busy because they’re not charging enough for their service and therefore not making any money or losing money on each new client.
A budget for your business is going to help you understand your business income and more importantly, your business costs. Knowing the inflows and outflows helps you to price your service and lets you know how to best spend your money.
Just about all of the business accounting programs will have a budgeting tool as part of the package. For a small start-up business these are usually perfect. They’re simple to understand and easy to use. They can provide you the guidance you need to start your business financials.
Budget basics…..
A budget has two main sections, the inflows (income) and the outflows (expenses). The income is easy. This is all the money your clients give you to perform your service along with any other money you receive. Other income line items can be interest income on savings or rebates you get from specific suppliers. Any income you receive in operating your business would show up in the income section.
The other (and larger) section of your budget is the expenses. This will have what seems like a million line items.
When starting your business it’s important to sit down and try to think of everything you’re going to need to buy or spend money on to start and operate the business. These are going to be plugged right into your budget so they can be properly accounted for. If they’re not on the budget, chances are, they’re losing you money somewhere and you don’t even know it. Here is a list of some of the line items you may have.
Owner’s salary
Employee salaries
Marketing costs
Payroll taxes
Health insurance
Consultant fees
Use or sales taxes
Retirement deposits for employees
Rent for office space
Utilities for the office
Telephone
Office supplies
Postage
Computer equipment and repair
Mileage for vehicles
Insurance for vehicles
Travel expenses
Meals & entertainment for clients
License fees
Taxes
Property insurance
Liability insurance
Life insurance
Accounting fees
Legal fees
Depreciation of assets
Dues and subscriptions
Credit card charges
Interest expenses (borrowed money)
Training
These are just a few of the items that could be in your budget. Depending on the type of business you’re running you could have twice as many or half as many.
Many people find budgeting to be a daunting task when in reality it can start out very simple. That’s how we did it. We started with a simple spreadsheet and as the years went on we added line items for more detail to develop the budget we use today.
The budget for next year gets drafted in October or November so that everything is ready for January 1. Our fiscal year coincides with the calendar year so your dates would depend on what you choose for your fiscal year.
Our advice here is to start your budget early and update it often. After a while you’ll find the numbers to be wrong or realize you’re spending a lot more money somewhere than you were thinking. This additional money needs to be accounted for and the budget will allow you to track it. You may notice it’s time to cut some costs because you’re spending too much money on things you shouldn’t be. In time you’ll learn what the numbers should be and you’ll be able to regulate your income and spending habits accordingly.
One very important piece of advice on budgeting is to keep your business and personal expenses separate. If you work from your home be careful not to pay any of your home expenses (utilities, mortgage, etc.) from the business income. It will give you a false sense of profitability and make it look like you’re making tons of money when you’re really not. Not to mention the IRS will frown upon you!
Don’t be afraid to budget early and update often (monthly)!