Are you flying blind, or do you know where your money's going?
Your business needs a budget to help you clearly outline where and how much you're spending. Planning your spending in great detail prevents you from overspending and, more importantly, offers predictability and peace of mind. You should regularly review your budget when your cash flow changes to help you stay within your business's means at every point throughout the year.
You may get away with running your business without a formal budget when you're very small. But as you grow, it will only get harder to know which expenses are directly generating revenue and which can be reduced or cut entirely without affecting growth. The best time to create your budgeting process is when you're smaller so it can scale with you and help you go even further.
Where do I start with creating a budget?
Before you start your budget, your business should have a clear set of goals and an accurate forecast. Those will help set the strategy behind your budget — which is important for knowing which areas to prioritize and allocate money toward.
Once your goals are set, then you'll need to gather your financial data and statements. Your balance sheet, income statement, profit and loss statement and other customized reports you may have are a good start.
| 📈 Learn how Enhanced Accounting Services can simplify the process. |
Plus, you'll need to identify your fixed and variable costs. Your fixed costs are expenses that remain the same from month to month, like rent and subscriptions. Variable costs are expenses that can change throughout the year, like supplies, marketing, and payroll. Simply go down your list of expense accounts and note which ones are fixed and variable.
You can ensure that your financial information is accurate by cleaning up your books and talking with your bookkeeper to verify that you're following best practices. Without accurate information on your books and financial reports, your budget may set you up to either overspend or not allocate as much as you need to spend in a particular area.
What are the five main sections of a business budget?
Your budget should be composed of five main elements:- Income: Your revenue sources
- Expenses: Your spending sources
- Gross profit: Your profit before taxes
- Tax: Your quarterly or annual tax amount
- Net profit: Your total profit after taxes and working expenses
You'll need to have an idea of what you'll owe in taxes to figure out your tax budget and net profit. Talking with a tax professional is the best way to estimate your tax liability accurately and make sure that your budget reflects that.
Can budgeting tools simplify the process?
After you've planned for your income, expenses, gross profit, taxes, and net profit, the next step is figuring out how to organize your information. The good news is you should already have access to an automated budgeting tool if you have accounting software (which is a good idea for every business owner). Two of the best options for small businesses are QuickBooks and Xero.
| 💻 Read: Best small business payroll and accounting software |
Taking advantage of budgeting software can help you compare your budget to your actuals throughout the year, and help you make changes on the fly. Using your accounting software as your budgeting tool can help with efficiency by keeping your information in one place. One of the reasons that people feel like they don't have the time to create a budget is because they don't think they can list out all of their revenue streams and expenses. By using your accounting software, you can actually do it quite quickly.
However, you don't need to use fancy software if you don't want to. A simple spreadsheet in Excel works fine as well if you're willing to manually monitor and update it. In fact, we’ll help you get started – just download our free budget template.
How to stay within your budget
Creating a budget is the easy part — the hard part is sticking to it. If you're new to budgeting, it's normal to overshoot or undershoot with your estimates. That's why things like forecasting and clean bookkeeping can help you create a more precise budget.Another way you can prevent overspending is by working with a bookkeeper to create your budget. Yes, budgeting and accounting software is available — but an expert guiding you through the process can help you identify discrepancies that can throw off your budget that a software might not.
However, don't let the fear of going over budget keep you from budgeting in the first place. It's important to keep a close tab on your budget compared to your actuals so you can quickly tell if you're going to be over budget in an area. The quicker you catch that, the quicker you can curb spending in other areas of your budget to compensate.
The bottom line
Budgeting sounds complicated. But in reality, it's simply listing what you expect to spend and make throughout the year. With a strategic budget and the right software to help you keep track of it, your budget is an essential tool that can help you better your business.
A budget helps you make sure that you have the money you need to invest in the areas of your business that will grow it — whether that's employees or products or systems. To get started building a budget and gaining clarity and predictability with your spending, contact DiMercurio Advisors today.
