In my experience, a lot of entrepreneurs shy away from using a budget in their business. They don’t see how it can help them, and don’t want to feel tied down.
But budgeting doesn’t have to be that way.
How would you like to stop worrying about how you’re going to pay your bills next month?
Ever faced decision paralysis when you just don’t know what to do next?
Do you want less stress in your life?
A good budget can help you do all of these things!
It’s time for you to experience the comfort of knowing you’re fully prepared for what life throws at you.
Here are 4 essential things to know before building a business budget to help navigate the year to come.
Plan for big expenses
Just like with your personal expenses, you need to have an emergency fund or a quick way to get cash from your most liquid assets. Even the most organized, well-planned out business will occasionally have an expense pop up that you weren’t expecting.
Got some old equipment that’s going to need replacing in the next few years? Start setting aside some money now so that you’re prepared for it to crap out at anytime. Preparing your business for big, but fairly predictable expenses can be as simple as setting aside a few hundred dollars every month.
With a little planning ahead, you can easily handle an unexpected or large expense in your business. Readying yourself for the unexpected will keep surprises from derailing you from your goals.
Recurring Expenses
Recurring expenses are the expenses that you expect to see repeating at foreseeable times, which makes them very simple to budget . Things like utilities, subscriptions, payroll, and insurance are all expenses that you can easily plan for since you know they’re coming and when.
Having a complete understanding of common expenses in your business is an absolute necessity. Obviously you need to know where your money is going, but this also allows you to plan your entire year in advance.
As I said above, there will always be surprises, but that should not be the norm. Most months will turn out exactly as you expected, and planning for those expected expenses will be the largest, but also easiest part of creating your budget.
Fixed vs variable expenses
It’s important to understand the difference between fixed and variable expenses when you’re creating a budget for you business.
Fixed expenses stay the same no matter how much of a product or service that you produce. Think utilities, rent, insurance, and the like. These expenses will be fairly constant, predictable, and can easily be budgeted for the year.
Variable expenses depend on how much you’re producing. If you’re creating a physical product, then more sales will easily translate into more inventory purchases and a higher labor cost. If you provide a service, then this might be font purchases, software subscriptions for individual clients, or paying to outsource to an independent contractor.
Variable expenses can be a little more difficult to nail down, but your budget should be closely related to a sales forecast. Take a look at the previous years and combine that with your goals for the year. Have different steps planned out for reaching, exceeding, and falling short of those forecasts.
Utilize Financial Statements
Your financial statements tell the story of your business, so you can use this historical data to help you plan for the future.
You can easily see, and plan for, any trends that will impact how you do business. All the expenses I’ve mentioned so far are laid out clearly in your monthly financial statements.
I’ve said it before, but I’ll happily say it again. Your books and financial statements are for so much more than just preparing for taxes. Laying out a budget is a snap when you have a complete list of where every cent went for any previous period.
You can compare month to month, quarter to quarter, and year to year. The longer you keep great books, the easier it will be to pull out data and trends.
For example, determining your slow months is simple when you can quickly compare year to year data. If you know that January is a slow sale month most years, then you can plan how to cover expenses with income from more bountiful times.
Evaluating the trends of your specific industry will allow you to eradicate the stress that comes from not knowing what to expect from month-to-month.
The Bottom Line:
A good budget is not a single, immovable plan. It needs to be flexible to allow for changes within your business as the year rolls on. It has to include contingency plans for the unexpected curve-balls that life loves to throw.
You’ll need to look into the future to have a thorough understanding of where you want your business to go and what bumps you may face in the road ahead. You also need a clear view of the past to most accurately predict what the future may hold.
Don’t be scared of a business budget. If a year seems overwhelming, then start with a quarter or a month.
If you need help, Still Waters Bookkeeping can help you to create a thorough and dynamic budget to help guide you in your decision making. A budget that includes an “if this, then that” format will help to ease the stress of everyday challenges.
Don’t be scared of a budget. When created and used correctly, it can be your best friend on the journey to fulfilling your dreams.