Maybe you’re in the early stages of starting your coffee roastery, or perhaps you’ve been running a hair salon for a while and want to expand. Regardless of where you are in the process, outlining a budget is vital for your business's success. Hypergrowth, or not adapting to market conditions, are some of the reasons that cause a business to fail. But when it comes down to it, one of the main reasons small businesses fail is, in fact, poor accounting.
But fear not. There are many things you can do to guarantee things run smoothly. One of them is building a business budget. Here’s how to do it.
What’s a budget and why should I care?
A budget is the financial plan for your business—it’s your roadmap to its success. Your budget is essentially a spending plan based on both your income and expenses. It can help you plan your business activities and acts as a benchmark for setting up financial goals.
A lot of research and thought goes into the process of creating a budget. You need to dig deep and look at industry trends, the capital you have to invest, projected income, and expenses.
After you have all that information, compiling it into a plan with the budget as its blueprint will help you predict your business’ revenue.
7 tips to creating your small business budget
Here are seven tips and tricks for setting up a budget. Spoiler–creating a budget becomes easier the more times you do it and the longer you’ve been in business.
1. Do your research
Researching industry standards and prices is key to creating the perfect budget. If this is your first time writing one, it’s going to involve a lot of estimates, guesses, and ballparking. But doing your homework will prepare you for the amount of rent you need to pay or the marketing budget you need to set aside. Industry standards will also give you insights about costs and revenue that are benchmarks for that industry.
If you’ve already been in business for at least a year, this is a good opportunity to look at your previous year's expenses and income, and pinpoint areas where you’re spending too much money. Use this time to seek competitive pricing on certain services or materials and negotiate with your current suppliers.
2. Create a spreadsheet
If this is your first time starting a business, you might be wondering what goes into creating a budget. In order to have a clear picture, it’s a good idea to put all of your expenses and income into a spreadsheet. When it comes to expenses, it’s easier to categorize them under fixed and variable costs.
Fixed costs remain the same regardless of how many services or goods you sell. Fixed costs include rent, utilities, and insurance. Variable costs change based on the number of goods and services produced and may include labor, commissions, and raw materials. Income is all the money coming into the business from sales, or services you provide–but more on that later.
3. Track all of your expenses
It’s not a coincidence that the word business is very similar to the word busyness. Running a business can get really hectic, and losing track of receipts, and invoices is too easy. While collecting receipts isn’t the most exciting part of doing business, neither is being audited by the government and getting fined. Keeping all of your receipts in one place is crucial to building an accurate budget. There are different online tools that can help you organize invoices and receipts. Accounting software like QuickBooks Online, allows you to upload invoices, and even pay them, all online. It also syncs your accounts payable and receivable (AP and AR) with Melio. That way, everything is organized in one place and you don’t get dinged for any late payments.
You can then download a spreadsheet with all of your expenses, which you can forward to your bookkeeper. If you’re doing your own bookkeeping, then simply copy-paste all the expenses into the spreadsheet you’ve created.
Within a few months, you’ll be able to see certain patterns, what you’re spending too much money on, and what you can cut back from. This can save you a lot of money in the long run.
4. Track your incoming payments
The fun part of running a business is seeing sales come in from all of your happy customers. Make sure to have all invoices for your services and goods paid on time. If you use a point-of-sale terminal, the software usually notifies you how many sales you made, daily, weekly, and monthly. Track the sales through incoming deposits to your bank account. If there are any late payments, send your customers a friendly reminder. When you have all your income laid out, add it to your spreadsheet.
5. Use software and online tools
Long gone are the days when we needed to jot down numbers on physical pieces of paper. Thankfully, now there are tools that can assist you while building your business budget. With online tools like Google Spreadsheet and Mint, you can build a budget and edit it in real time. Plus, Melio, an online accounts payable software, can help you upload receipts, pay your vendors, send your customers invoices, collect payments, keep track of it all in one place, and sync with your accounting software. Using tools like these can save you hours of back-office work, automatically giving you a realistic view of your cash flow and the insight you need to adjust your budget accordingly.
6. Leave some wiggle room
When you’re a business owner, the unexpected can and will happen. It might come in the form of an expensive tool breaking, increased rent, inflation, or even a pandemic. Keeping a reserve fund and adding that to your budget might seem excessive, but it never hurts and will give you peace of mind if things go wrong.
Putting aside a rainy day fund is never a bad idea, but might be challenging if your business is new and is limited on funds. If that’s the case, you can be conservative when budgeting, and expect costs to be high and revenue to be low. That way you’ll have extra cash and be ready for anything that comes your way.
7. Cut costs
If you’re trying to grow your business and need capital for the next move, consolidating expenses is a good way to cut costs and put money aside. All those business lunches can add up and are easily avoidable if you’re trying to save up.
Another way to cut costs is by contacting your current suppliers and renegotiating prices. If you own a cafe and your business is spending thousands of dollars a month on takeaway cups or coffee beans, it’s worth asking for a discount. Even the slightest discount on goods can add up to a lot of savings in the long run. Plus, it never hurts to ask. If they don’t agree, it might be a good time to look at sourcing alternative suppliers.
A goal without a plan is just a wish
While starting a business is all about dreams and craftsmanship, the reality of managing payments quickly complicates things. Having a budget that you can rely on as your guiding star is essential to help steer your business in the right direction. Don’t get frustrated or give up. Your budget is a living, breathing document. In other words, whatever you expected your expenses and revenue to be when you first wrote, it might change drastically from month to month. It’s important to revisit your budget monthly, and tweak it according to your business’ performance.
With the right mindset, research, online tools, and patience, your budget will help you make business decisions that bring your visions to life!