How to Create a Simple Business Budget That Doesn’t Break Your Brain
For many of us, the prospect of simply creating a budget is scary (and is perhaps actually scarier than the act of budgeting itself). It makes sense: creating a budget requires some legwork and, if you’re not in the right mindset, may cause you to feel afraid of what you might find out about your spending habits.
But well-done budgets can be so freeing. They can ultimately take a lot of the fear out of our finances. And because your business generates some or all of your income, it’s almost more important to create a budget for your business than it is to create a personal budget. (Note that I said almost; both are important!)
Luckily, creating a budget for your business doesn’t have to be difficult or daunting. I’ve developed a simple five-step guide you can follow to create your own business budget right now and get more clarity on your business finances. Let’s get started.
But First, Do You Really Need a Business Budget?
Perhaps you already know why you need a budget for your personal finances. A personal budget can help you make more intentional decisions with your money, reach your goals more efficiently, pay off debt faster, and ensure you’re living within your means.
A business budget does all these things as well. But a business budget can also galvanize you and your business to get on a path that ensures long-term success, which means more security and money in your pocket for years (or decades) to come. A business budget helps to clarify:
How much money you expect to earn in a given timeframe
Whether your cash flow is adequately covering your business’ monthly expenses
When you have leftover money that you can reinvest in the business
When months are slow for your business, so you can prepare, make necessary changes, and stay out of debt
How much you need to increase your revenue or cut expenses to become more profitable
Knowing these things allows you to optimize your systems and plans to invest in your business when times are good and create a safety net for when times are tight. This clarity helps you to be intentional about your business finances and increases your ability to grow and thrive in a way that is sustainable.
Okay, so now you know why you need a business budget. You just need to know how to get started. I’ve got you covered. Follow the steps below and you’ll have created a business budget that will benefit your finances for years to come (as long as you stick with it).
1. Count Up All Your Revenue
Your first step is to determine how much revenue your business produces. Calculate your monthly income from your business for the past six months to a year (or more, if possible). As you go through this process, make sure you’re calculating the business revenue rather than the profits. Revenue is every source of income that comes into your business before subtracting taxes or expenses.
Depending on how long you’ve been in business, it can be most beneficial to calculate monthly revenue for at least the past year. Calculating your monthly revenue for at least a year may help to reveal any slow periods your business experiences, which are totally normal.
For example, some businesses experience a seasonal downturn after the holidays or during the hot months of summer. The more information you have from the past, the more accurate your forecasts for the future will be, and the more time you will have to prepare for these slow periods next year.
2. Determine Your Fixed Costs
Next, it’s time to determine your fixed monthly costs. Fixed costs, by the way, are also known as overhead costs. These are costs that are not dependent on the level of goods or services produced by the business. They also tend to be recurring. For example, fixed costs might include:
Rent on your office or store space
Fixed recurring supply costs, such as your website hosting fee
Payments on debt balances
Employee payroll
Subscription fees
Taxes
Insurance
Your fixed costs depend on the nature of your business, so your actual costs may be different than the ones listed above. You might notice that some fixed costs are annual and some are monthly. To stay consistent, divide the annual costs by 12 so everything is calculated monthly. Add each item together so you know how much your fixed costs are per month.
3. Determine Your Variable Costs
The third step is to determine your variable costs. This is perhaps the most difficult part of creating a business budget, but you can do it! Variable costs are just that – they’re variable! They don’t have a fixed price, and they fluctuate depending on your business performance, activities, and uses of other goods and services. Variable costs might include:
Utility payments
Owner’s draws (what you pay yourself)
Sales commissions
Professional development
Marketing
Office supplies
As with revenue, the more months of variable expenses you can gather, the faster you’ll be able to spot patterns and better prepare for when those variable expenses creep higher during the year. This knowledge allows you to make more accurate spending projections so you can budget appropriately.
It’s absolutely okay if your budget isn’t absolutely perfect when you’re first starting out. Do what you can to gather as much data about variable costs as possible. As long as you stick to your budgeting habit going forward, you’ll be able to spot patterns more easily over time.
4. Calculate a Profit & Loss Statement (aka Bring It All Together)
Finally, it’s time to bring all this data together and create your profit and loss statement. While a profit and loss statement might sound scary, you’ve already done the hard work. You simply have to add all your monthly expenses (your fixed costs and variable costs) and then subtract those expenses from the monthly revenue you calculated in Step 1.
That’s all there is to it! Do this for each month you have data so that you have a profit and loss statement for January, February, March, and so on.
Hopefully, the number you get for each month is a positive one. But if it’s not, at least now you know! You can take the steps needed to cut back on your expenses or work to increase your profitability. And if your profits are significantly higher than your expenses but you’re not doing anything with that money, now you know you have some options with the profits. You can take more home, build your reserves or reinvest in the business!
5. Keep Business Budgeting With an Eye Toward the Future
You’ll receive the greatest benefits of budgeting if you budget consistently. Once you’ve done the legwork, all you have to do is keep tracking your revenue and your expenses. The longer you budget, the more data you’ll have to make more accurate projections, save for your business investment goals, and grow your business to achieve the success you’ve always dreamed of.
Find a budgeting tool that works for you. Whether you invest in accounting software like Quickbooks or use a free budgeting template from Google Sheets, create your budget on a platform that’s easy for you to use and that you can seamlessly integrate into your daily habits. This will make it much more likely that you’ll continue to budget going forward.
How Financial Fitness Coaching Can Help You & Your Business
Creating a business budget is a great way to get clarity and take control of your business finances. But sometimes, you need just a little extra help when it comes to managing your cash flow, implementing sound systems for maximum efficiency, and learning how to pay yourself more and consistently.
The team at Financial Fitness Coaching is here to help. We specialize in helping small business owners and entrepreneurs maximize their profits, master their cash flow, and build confidence with their finances. To see how we can help you and your business, email me at kristen@financialfitnesscoaching.com or simply schedule a free 20-minute Discovery Call on my calendar below.