Written by: Ethan Rome
In simple terms, a budget is a spending plan that businesses use to plan their expenses vis-à-vis their net income. By extension, a business budget is a yardstick that businesses use to understand their cash flow, estimate their overhead costs, predict revenue & profits and set up financial goals. What’s more, most financial institutions require small businesses to have a comprehensive budget before qualifying them for business loans. This makes budgeting an important cog in the bigger wheel that’s small business planning.
Unfortunately, many upcoming entrepreneurs don’t attach as much importance to budgeting as they should. A survey done by Clutch in 2020 showed that half of America’s small businesses operate without an official budget document. The survey also revealed that over 65% of small businesses that created official budget statements in 2020 followed their budget to the letter. These businesses had a relatively easier ride through the pandemic compared to businesses that operated without a budget. This further highlights the importance of budgeting for small businesses.
If this is the first time you’re considering creating a budget for your small business, this guide provides 7 smart small business budgeting tips that you will find useful.
1. Start by preparing your profit and loss statement
The importance of a profit and loss statement is that it helps you tally your income sources, compare them with the expenses, and determine your net profits. The statement eliminates guesswork and biases when figuring out how much money different income streams bring to your business each month. For example, if you operate a brick-and-mortar fashion business that has an online store, you need to know how much income the online platform generates vs. the income that the offline store generates. That gives you a clear idea of where to invest most of your money.
2. Understand the 3-tiered monthly expenditure scheme
There are 3 types of expenses that you need to understand for effective budgeting:
- Fixed expenses
As the name suggests, these are expenses that more or less remain the same regardless of prevailing market conditions or the number of customers you get in a month. They include rent, monthly credit card processing charges, employee wages, insurance fees, office supplies, etc.
- Variable expenses
These ones vary depending on changes in the market. They include packaging & shipping costs, transport costs, production costs, and raw materials, etc. When the cost of fuel increases, for example, shipping and transport costs increase as well.
These ones are somewhat fixed, but they are sometimes susceptible to changes in the industry. They include marketing costs, legal fees, business loan repayments, and miscellaneous expenses. For example, if you work with social media influencers, their budget is fixed to a great extent. However, you may need to jump onto a viral social media trend/challenge in the middle of the month, requiring you to either hire new temporary influencers or pay an extra fee to your existing influencers.
3. Prioritize taxes, insurance, and loan repayments in your budget
You don’t want authorities (the IRS) to come after your small business and shut it down because you missed a tax deadline. You also don’t want the bank to auction your business because you defaulted on loan repayment. And most importantly, you don’t want to miss out on insurance benefits because you failed to pay your monthly insurance premium.
4. Take advantage of deals that help you cut costs
Quality doesn’t have to be expensive. When budgeting for your production, shipping, or packaging, try to find service providers who give you the best value for money. In the labor market, find employees who can multitask, who don’t inflate your wage bill, and who help you cut down on running costs (by working from home, for example). And when budgeting for monthly internet, calls, and texts, go for SIM-only deals that give you more pocket-friendly, flexible deals compared to standard monthly phone deals.
Note: You need to be extremely careful not to jeopardize quality, productivity, or efficiency as you try to cut costs. Don’t cut any corners.
5. Be a realist
Avoid the temptation of setting overly-ambitious budgets that are based on wishful thinking. Such budgets more often than not set you up for failure. Always set clear & realistic expectations that are based on analysis and data. Remember to take into account potential risks and challenges when allocating funds to each vote-head in your budget. All these precautions help you avoid money-draining trouble spots and optimize your profits.
6. Invest in the right budgeting tools
It is advisable to have an in-house accountant to manage your business finances. But due to financial constraints, you may have to manage your finances on your own, only bringing in experts as temporary consultants. That is where budgeting, time management, employee performance tracking, cash flow management, credit card processing, accounting, client booking, tax calculation tools, and other business tech tools come in handy. These tools help you approach complex financial subjects professionally even when you are an amateur.
7. Stick to the budget with complete devotion
Lastly, ensure that everyone in your team (especially department heads) is guided by the budget, every step of the way. There is no point in making a budget if you don’t have the financial discipline to stick to it. Remember, being the business owner and vision carrier, real accountability starts and ends with you.
Bonus tip: Review your budget periodically with your team to ensure that everyone is on the right track.
It takes money to make money- your business cannot grow if you are afraid to take risks and put your money where your mouth is. However, no business enjoys the luxury of spending money without a clear, conscious, and elaborate plan. Use the 7 tips above to create an elaborate plan for consistent, sustainable business growth.