One of the most crucial factors when starting a small business is your budget. You must be able to pinpoint where the money is coming from, where it’s spent, and how to change line items to stay afloat.
A budget is an estimation and prediction of your business’ bottom line and overall financial health over a given period. It records your income and expenses, giving you an idea of how your business is performing, and it enables you to forecast your financial health over the coming year.
Maintaining an accurate, functional budget is essential during all phases of running a business, but for small business owners, staying on top of a budget during those early years when your margins are razor thin can mean the difference between keeping your head above water and having to start over.
Consider these small business budgeting tips for starting and maintaining a budget that benefits your business.
Understand What Exactly a Budget Is
Not all budgets are created equal. For example, you can budget based on your cash flow, recording income and expenditures only when money changes hands, or you can plan based on accrual, filing statements before they’re paid. You can use a method called a zero-based budget, in which statements are balanced so that income and outflow always equal zero over a set period.
When building a budget for the first time, start as simple as possible. We recommend using the following formula:
Budget = Income Sources – Fixed Costs – Variable Expenses – One-time Costs
What do these different categories mean?
- “Income sources” is a measure of all the money flowing into your business through sales, investment income, and other sources.
- “Fixed costs” consist of your overhead for running your business: the cost of utilities, insurance, and other constant expenditures.
- “Variable expenses” are those expenses you pay on a regular basis but for which the amount varies. This includes materials, contractor wages, transportation, travel, and any other cost that fluctuates based on specific aspects of your business.
- “One-time costs” are unexpected expenses, such as replacement computers and gifts, that you can begin to predict as you get a measure of their average costs over time.
How to Get Started
You have the building blocks for creating a small business budget, but what precisely does it take to get started?
First, decide on a budget format. Most people use a spreadsheet, but there are numerous pre-made templates from which to choose that are free to download and easy to fill out with the relevant financial details of your business. From there, you’re ready to start taking a more involved role in managing your business’ finances.
The following are some important small business budgeting tips to keep in mind as you begin to operate a functional budget.
When you’re forecasting dynamic expenses that you can’t precisely predict, such as the costs of advertising and contractor payments, make sure to budget for more than you think these expenses will likely add up to in the end. It’s better to operate under tighter margins from the start than be caught off guard by expenditures that are higher than your budget allows.
Account for Risks
Successful budgeting depends upon having sufficient money to spend on any cost that arises. While most of your business’ revenue is committed to actual line items and expected expenditures, risk is a constant with which every business must contend. Let’s take a hypothetical:
You run a brick-and-mortar retail business with tight margins. One day, the street floods, ruining a significant amount of your equipment and inventory, thereby forcing you to close for a few days. Do you have room in your budget for a cleaning crew? What about replacement inventory? Can you afford to shut down for a few days?
Risk management and budget planning are inherently related. It’s the same logic as with the “One-time Costs” line items from the budget breakdown above. You must be able to predict occurrences that are out of your control and have room in your budget to recover. With that said, these unforeseen events won’t happen all of the time. If you go a few months without unexpected costs cropping up, don’t suddenly feel like it’s necessary to reinvest the money set aside to cover these costs. If you have several months’ savings in these areas, you’ll be better equipped to handle a worst-case scenario in the future.
Understand the Sales Cycle in Your Industry
Regardless of your industry, it is unrealistic to expect your budget to remain static all year. For many retailers, the holidays provide up to double the demand compared to the rest of the year. As the controller of your budget, you should be prepared to predict this market fluctuation. When your busy season arrives, your income will increase, but have you budgeted for an increase in labor spending? What about increased inventory? These are the things to think about before these cycles come around so that you’re not caught off guard when the time comes.
Communicate Important Aspects of Your Budget to Your Team
Maybe you’re in charge of the finances at your small business, and keeping the budget currently is your sole responsibility. That’s fine, but you can’t be the only person informed about this budget if other people are going to be held accountable for it. When you build your budget, seek input from partners and managers whenever applicable. You may not always know where costs are coming from and whether specific budget goals are feasible.
Understand the Wider Effects of Budgetary Changes
It’s important to keep in mind that making changes to one line item has an impact on more than just that area. For example, let’s say you want to increase your labor force in advance of a cyclical uptick in business. You change your budget forecast by, say, 15% for labor, but that’s not the only area of your finances that will be affected. If you pay any of these new employees benefits, you’ll have to account for those, as well as increased payroll taxes, in the budget. This is just one example of how you have to prepare for relationships bringing about hidden costs in your budget.
Your Budget is as Dynamic as Your Business
When using these small business budgeting tips to build your budget and forecast for the future, it’s important to remember that as your business grows, your budget will change. There are changes in your budget you won’t be able to predict—anything from increased investment in a new marketing channel or a workforce expansion to something more substantial like a change in the federal tax rate for small businesses. That’s why it’s important to stay as flexible as possible as you undergo growth in your store. When one cost increases, find another one that you can decrease, at least in the short term.
The most successful small businesses win with their budgets year after year. Business owners who operate smart budgeting strategies can forecast growth and account for it by making changes within their business. Becoming more productive while keeping an eye on the bottom line is just one way to manage achievable growth, even when your budget doesn’t have the margins that you’d like.
When you’re just getting started with your small business, it can be stressful to manage your finances while also responding to unexpected changes and trying to grow in your industry. With these small business budgeting tips, you’re well on your way to lasting success.