Many of us have a negative reaction to the word “budget”.
While a budget is simply an estimate of income and expenditure for a set period of time, the word often creates images of hardship and suffering, giving up good things, and making sacrifices – at least in our personal lives.
The reality is, your business budget can be your best friend. And a very powerful tool that supports your business. In a nutshell, your budget is the road map for your financial success (and who doesn’t want that?).
A budget can (and should) be created for all companies, regardless of size.
I’m always surprised at how few small businesses have prepared a budget. Why don’t more business owners create budgets rather than simply reporting on their business activity? Perhaps it’s because they don’t know how important the budget is … or how to create one.
It does take a bit of time to prepare your business budget (most in under 2 hours). Your efforts will give you a better understanding of that your business will look like across the coming year, so it’s time well spent.
It’s time to take the mystery out of creating your business budget!
BUILD YOUR BUDGET WITH FOUR SIMPLE STEPS
In order to create your budget, you’ll need to estimate four kinds of data: income, fixed expenses, variable expenses, and one-time expenses. Let’s break these down:
- Determine your income. How much money are you bringing in each month? You’ll want to include sales of products or services, investment income, and any continual miscellaneous income you may have. (Note: Borrowing money is not considered income. Don’t put borrowed money here).
- Determine your fixed costs. These are things like rent, utilities, professional services (accountants, attorneys, consultants), cell phone/internet, software expenses, and bank fees. You can find these costs by running your Profit and Loss Statement by month and reviewing it for consistent monthly costs.
- Add in your variable expenses. These could be a wide range of things, but would commonly include advertising and marketing costs, employee costs, transportation, travel, printing, contractor wages, and raw materials. Variable costs are usually dependent on other parts of your business. For example, your employee costs may go up as revenue rises, so you can create a formula in your spreadsheet to have employee costs rise (or fall) at the same rate as revenue.
- Estimate one-time expenses. All businesses have these; sometimes the expense is planned and other times it is an unhappy surprise. This could be furniture and equipment, office supplies, and gifts. Anything that you purchase just once during a year would fall into this category.
Once you’ve gathered this data you have everything you need to create your budget. There’s a variety of accounting software programs available to help with this, at a wide range of prices (watch for my upcoming post on the software I use and recommend).
I show you how to take your prior year information and build a budget using Quickbooks Online in this video below:
THE BEST TIME TO PREPARE YOUR BUDGET
Ideally, you would prepare your budget for the coming year at the very end of the previous year. That way, you can start the new year in great shape.
If you didn’t start this year with a budget, don’t panic! Although it’s helpful to have before the year begins, it is never too late to create a budget for your business.
Feeling overwhelmed or worried about how much effort this will take? Here’s my solution: put together a budget for the next three months only. You’ll be able to practice the budget process and you’ll be able to compare your actual results to your budgeted figures. Then you’ll be ready to prepare your budget for the balance of the year!
If you don’t want to go at this alone, don’t worry because I have my Ultimate Strategic Budgeting Package that will get you sorted and on your way to winning your year.
WHEN TO RUN YOUR BUDGET VS ACTUAL REPORT
So, you’ve got your budget created, and you (or your bookkeeper) is inputting your income and expense data into your accounting system. Great! Now you have what you need to run your budget vs actual report. You’ll want to run this report at the same time every month – typically this would be at month-end.
MAKE YOUR BUDGET WORK FOR YOU
You might be wondering what to do with the information your budget provides. After you have run your budget vs actual report each month, the data there will help you:
- Control spending
- Pinpoint unexpected costs (particularly if you see a trend you need to investigate and address)
- Reduce risk of overcommitting ad overspending
- Plan for future financial needs
- Evaluate the performance of your company
- Make decisions about compensation for employees and owners
And, very importantly, when you track your business operations to your budget, you will be able to feel more in control of the trajectory of the business towards your goals.