Is your business a leaky ship?! Do you have any idea where your cash reserves are going?! Or do you not even have cash reserves?
Don’t let your financial future be a pipe dream. A well-crafted budget can be your roadmap to success.
Creating a business budget can be an overwhelming task. But with me as your guide, you’ll be a budget-building pro in no time!
Hello! My name is AJ. I recently sold my business for a seven-figure exit. I attribute much of my early success to the fact that I created a budget and stuck to it.
So, let’s get started!
What is a Business Budget?
A business budget is a financial plan that outlines how much money your small business has and where it will be spent.
It also includes estimated income and expenses over a specified time.
A well-crafted budget can help you manage costs, increase profits, and meet short-term and long-term goals.
Think of it like a roadmap for your business – it tells you where you’re heading and how to get there.
What a Business Budget Isn't
- A business budget is not a shackling chain that restricts your financial freedom.
- A business budget IS NOT complicated spreadsheets and hard-to-understand accounting terms.
- A business budget isn’t a set-it-and-forget-it document; it’s dynamic and should be updated regularly.
- A business budget isn’t guesswork; data, facts, and realistic projections should fuel budgeting.
- Finally, budgeting isn’t an activity reserved for ‘financial gurus’ – all business owners can (and should) do it.
Benefits of a Business Budget
There are several reasons why creating a budget for your small business is important.
Let’s take a look at some of the benefits.
A Business Budget Helps You Establish a Financial Plan
Creating a budget is the first step to establishing a financial plan for your small business.
This will help you understand your current and future finances, make informed decisions about allocating resources, and set realistic business goals.
Imagine if you were going on a road trip and didn’t have a map. You’d be more likely to get lost or make wrong turns.
The same applies to your business – without a budget, you won’t have a clear sense of direction or know how to measure your progress.
A Business Budget Helps You With Financial Predictions
A business budget can help you with financial predictions.
You can accurately estimate and plan for future expenses and predict sales trends to adjust your budget accordingly.
By creating a budget and tracking your finances, you will have an idea of how much money you’ll need for any investments or major purchases in the future.
You can find out, on average, what kind of business expenses are expected and adjust your budget accordingly.
It can also help you plan for seasonal fluctuations in your sales and how to manage those if they occur.
A Business Budget Helps You With Growth Targets & Sales Goals
When you create a budget for your small business, it will help you set realistic growth targets.
You will be able to identify areas where more funds are needed and ensure you allocate enough money in the right places.
By understanding your financial situation, you can plan for long-term business growth and focus on future goals that will benefit your business.
As a business owner, planning and setting achievable goals is essential.
A Business Budget Helps You Monitor Performance
Your business budget will also help you monitor and evaluate your business performance.
You can adjust the budget by identifying key areas to save money.
This will enable you to understand better how much money is coming in and going out of your business.
Once you have everything in place, it’s time to start tracking your budget and finances.
By doing this, you can quickly identify any discrepancies that may be causing problems with your budget.
A Business Budget Helps You Manage Cashflow
Creating and following a business budget will help you manage your cash flow better.
You will see where your money is going, and it can also help you plan for future expenses.
By tracking your spending, you can ensure that any unexpected costs don’t throw you off track. Remember, cash flow is king!
Knowing your cash flow will help you make informed decisions about managing your finances and keeping your business running smoothly.
How Does a Small Business Budget Work?
Now that you know why creating a business budget is essential, let’s discuss how it works.
The first step to creating a small business budget is determining your income and expenses.
This will give you an idea of how much money you have coming in and going out each month, and you can set goals for your budget and allocate resources accordingly.
You will also need to keep track of your progress by monitoring expenses and comparing them to the budgeted amount. So you aren’t out there spending money you don’t have.
If you find that there are discrepancies, then adjustments can be made to stay on target.
It’s important to keep referring back to this budget to ensure you are still on track and meeting your goals.
Creating a budget is essential for all small businesses because it helps you manage your finances more effectively.
Types of Business Budgets
Let’s look at the different types of business budgets and how they can help your small business.
A master budget is all of your company’s planned income and expenses, consolidated into one document.
It’s created annually and includes estimated sales, production costs, overhead costs, capital expenditures, and other financial commitments.
The master budget is a comprehensive plan that encompasses all aspects of your business operations – from running day-to-day activities to long-term planning.
An operating budget covers the day-to-day business expenses, such as salaries, materials, and other operational costs.
It’s usually created monthly or quarterly to help you manage daily operations more efficiently.
Cash Flow Budget
A cash flow budget is designed to help businesses manage their money and plan for any changes in cash flow.
It takes into account the expected costs of operating a business as well as any expected revenue.
The goal of this type of budget is to ensure that there are enough funds available to keep operations running smoothly.
A financial budget is designed to give a business an overview of its finances.
It takes into account the expected income, expenses, and debt payments for a given time.
It also helps businesses plan for investments and other large purchases before they happen.
A static budget is a budget that doesn’t change, no matter what happens.
It’s designed to give businesses a baseline of what their expenses and income should be regardless of market or business environment changes.
A company might use a static budget when they know their expenses will stay the same for a given time.
Business Budget Essentials
I have a list of steps that you can follow to create a successful business budget.
Calculate Your Average Monthly Revenue
The first step is to calculate your average monthly revenue. This means adding up all your income over the past year and dividing it by 12 months.
This will give you a good indication of what kind of money your business can expect over each month.
If you’re just starting, estimating based on your projections is best.
Please also take into consideration your revenue increases. If your revenue is growing 10% month over month (steadily), take that into account.
Subtract Fixed Cost
Once you have your average monthly revenue number, it’s time to subtract your fixed costs from that figure.
What are Fixed Costs?
Fixed costs are expenses you must pay each month, no matter what.
These payments remain the same each month.
Fixed Cost Examples
This could include:
- Accounting Fees
- Other Regular Payments
Subtract Variable Costs
The next step is to subtract any variable costs from your total.
What are Variable Costs?
Variable expenses are those costs that fluctuate each month depending on sales, production costs, and other factors.
Variable Cost Examples
These could include:
- Shipping Fees
- Advertising Costs
Determine Your Gross Profit
You’ll be left with your gross profit once you subtract the fixed and variable costs from your total.
This figure is what’s left after all of your expenses are paid, and it’s the number you can use to make decisions about budgeting for future purchases or investments.
Think of gross profit as the money you have to invest back into your business.
Gross Profit Formula
To calculate your gross profit, use the following formula:
Gross Profit = Total Revenue – (Fixed Costs + Variable Costs)
While this formula isn’t complicated, tracking your expenses and revenue accurately is crucial for an accurate gross profit figure.
Account for Net Profit & Taxes
You’ll also need to account for any taxes you must pay and subtract them from your gross profit.
This will give you the net profit number, which is the amount of money you’ll have to invest back into your business.
How I Create a Business Budget
Here’s my step-by-step process for handling a business budget.
Step 1. Download My Business Budget Template and Personalize It
Begin by downloading my tried-and-tested business budget template. This template has served me well over the years, and it’s ready to do the same for you.
Add your own categories to the template, tailoring it to suit the unique financial needs of your business.
A good rule of thumb is “When in doubt, add a category.” You can never have too many.
I like to get as granular as possible with my categories so I don’t overlook anything.
The answer to your question is “NO.” I’ve never gotten charged for Starz when I’ve not watched it.
Step 2. Choose Your Accounting Software (or Don’t) and Input Your Categories
Next, decide on the software you’ll use to track your budget.
I personally use QuickBooks, but If you don’t want to use something that has a monthly cost, this process can work by reviewing your bank statements.
Next, Input your categories from the customized budget template into the software.
Step 3. Forecast Your Monthly Expenses
Use the budgeting template to project out your expenses for the upcoming month.
Be as realistic as possible, remembering that underestimation can lead to budget shortfalls.
I like to project out all of my expenses on a week-to-week basis (see budget template); this way, I know exactly when payments are due and how much money I need in each account.
Pro Tip: If you track when certain monthly payments come out of your account, you can easily add those to your budget and never miss a payment again.
Step 4. Track Your Monthly Expenses
Tracked expenses are the key to a successful budget.
Use your chosen software to log all your business inflows and outflows weekly.
Again, this can be done with your bank statements; it just takes longer.
Step 5. Input Weekly ACTUAL Expenses into the Budgeting Template
Keeping an eye on weekly outflows is crucial.
Every week, enter your weekly actual income and expenses into the budget template.
Step 6. Review Your Budget Regularly and Compare Projections Vs. Actuals
The key to effective budget management is regular review and adjustment.
Each week, take the time to sit down and look at your budget.
Compare your projected income and expenses against the actual numbers.
This is vital, as it provides a reality check and allows you to adjust your budget as required.
If you notice a consistent pattern where your actual expenses are more than projected, it’s time to revise your estimates.
On the other hand, if your income consistently surpasses projections, you may want to consider investing more in growth initiatives.
Remember, your budget is a living, breathing document and should never be stagnant.
Step 7: Rinse and Repeat
The last step is arguably the most important – consistency.
Rinse and repeat this process every month.
How Long Does a Business Budget Take
Here’s the time commitment I put in on a month-to-month basis.
Start/End of the Month
- On the 1st of the month, I’ll take an hour to finalize the previous month’s budget and project out the coming month.
- Every week, I’ll take about 20 minutes to categorize expenses and add them to the spreadsheet.
All in all, it takes about 2-2.5 hours to run a healthy budget.
Business Budgeting Tips
Here are a few tips that have helped me with budgeting for my business.
Tip 1: Set Monthly Earnings Goals
When creating a budget, one of the first things I like to do is set a monthly earnings goal.
This way, you can ensure you’re allocating enough money to meet your business’s goals.
Not hitting your earnings goals? Allocate more of your budget to sales or marketing!
Tip 2: Set Monthly Spending Goals
You should also set monthly spending goals based on the money you have coming in.
This means establishing how much money you can spend on supplies, advertising, and other expenses without exceeding the budget.
When I ran my agency, we allocated a certain percentage to OPEX (operating expenses). From there, we created different “buckets” for an owners draw, taxes, profit and even marketing.
Tip 3: Analyze Areas of Weakness
When tracking your budget, it’s crucial to analyze areas of weakness.
Are there any expenses that are higher than they should be? Are you spending too much money on advertising?
These questions can help you identify problems and make necessary changes to keep your business running smoothly.
Tip 4: Make Predictions Monthly on the First
I recommend making predictions monthly on the first day of the month.
This helps you anticipate any expenses or revenue changes and make better budgeting decisions for the next month.
Pro Tip: You should create a spreadsheet with two columns every month. Column A should be your projected budget, and column B should be your actual budget. From there, review your budget at the end of the month!
Tip 5: Factor in Seasonality/Industry Trends
When creating your budget, it’s a good idea to factor in seasonality and industry trends.
For example, if you have a business with seasonal peaks and troughs, then account for those in your budget.
The same goes for any industry-specific trends. If demand for your product or service declines, adjust your spending accordingly.
Tip 6: Keep Your Personal & Business Accounts Separate
Your personal finance should not be mixed in with your business finance. Keep the accounts separate!
Having two different accounts will help you keep track of your expenses on both sides and avoid any confusion.
Tip 7: Choose a Solid Budgeting Tool
Finally, choose a solid budgeting tool to help you stay organized and on top of things.
Plenty of different options exist, from cloud-based tools to spreadsheets. Choose the accounting software that works best for you and your business.
For budgeting, we usually use Quickbooks (because it’s cheap and easy to use) but most other apps will work.
Tip 8: Be Conservative With Revenue
When estimating your monthly revenue, be conservative with your projections.
Don’t overestimate how much money you’ll earn this month. It’s easy to get carried away and spend more money than you have coming in.
If you are conservative, you can ensure that you always stay within budget and meet your goals.
Tip 9: Plan for Business Growth
Lastly, always plan for growth.
This doesn’t mean you have to make large investments or take risks; it just means that you should be ready to scale up when the opportunity arises.
Keep an eye on industry trends and make adjustments to your budget accordingly.
That way, you can ensure that your business can grow without putting too much strain on the budget.
Best Business Budgeting Software
I have a couple of favorites when it comes to budgeting software.
Zoho Books is a cloud-based accounting solution that helps small businesses manage their finances.
It offers features like invoicing, expense tracking, and budgeting. It also integrates with popular apps like PayPal, Stripe, and QuickBooks.
QuickBooks is a powerful accounting platform used by many small businesses.
It offers a range of features including invoicing, budgeting, expense tracking, and inventory management.
Business Budget Final Thoughts
Creating and maintaining a business budget takes effort but pays dividends over time.
Taking control of your finances is essential to running a successful business, and budgeting is the key.
Once you have a handle on your cash, you’ll systematically become less stressed with your finances, better understand where your money goes, and uncover areas for potential savings.
I hope these steps have given you the confidence to create a financial plan that works for your business.