How To Create A Budget For Your Small Business
Some aspects of your business — like access to capital — may be beyond your control. But there’s one thing that every business owner has full control of that can make (or break) your business. It’s no big secret; your business needs a budget.
If you don’t have a budget for your small business, or your budget needs tweaking, you’re in the right place. We’ll take a look at why your business needs a budget, what you should include, and even some budget specifics based on your industry. The great news is that budgeting is simple but can make a big impact on your business when done right. We’re going to help you get it right.
Keep reading to learn more about budgeting for your small business.
Table of Contents
Why Your Business Needs A Budget
A budget is critical to building a thriving business. Unfortunately, though, many small business owners don’t have a budget in place. According to a survey conducted by Clutch, 61% of small business owners did not have a formal budget in place in 2018. The stats get even worse for businesses with 10 or fewer employees — 74% of these businesses did not have a formal budget.
Unfortunately, not having a formal budget in place is a misstep that could financially harm your business. Here’s why it’s worth carving out time to create a budget for your small business:
Track Your Finances
With a budget in place, you’ll be able to track the income that’s coming into your business, as well as the money that’s going out. This is a critical step in tracking and assessing your cash flow.
It’s easy to go overboard when it comes to spending money. With a budget in place, you can keep yourself in check. By making (and sticking to) a budget, you can curb unnecessary spending that’s taking money out of your business … and your pockets.
Make Cuts Where Necessary
Tracking your expenses with a budget helps you identify areas where you can cut spending. If you notice that you’re approaching or exceeding your budget in one area, you can take steps to lower costs — such as by changing providers or suppliers or negotiating discounts.
Is there an area in your business that isn’t bringing in any income? With a budget, you can identify where revenues are falling short and make adjustments as needed.
Plan For the Future
Not only does your budget give you an overview of where you stand financially in the present, but it can also help you plan for the future. What goals do you want to hit next month? Next year? Where can you cut costs, and where can you boost income? If an emergency expense arose, would your business be able to handle it financially? A budget can help you answer these questions. Your budget can help you identify trends, forecast future income, and reach your financial goals.
If you need additional capital to grow your business, start by mapping out a budget. Not only will this help show you how much you can afford to borrow, but many lenders may also require a budget when you apply for funding.
What Your Small Business’s Budget Should Include
Now that you see the importance of a budget, it’s time to get started in creating one personalized for your business. Gather your documentation and information so you can start mapping out your budget, which should include:
- Income: Identify all sources of income for your business. If you own a retail shop, your in-store sales may be your only source of revenue. But your business model may be a bit more complicated and bring in multiple revenue streams (i.e., through in-person sales and online sales).
- Fixed Expenses: Many of the costs associated with operating your business are fixed, meaning that they are the same each month. This includes your rent or mortgage payment, insurance premiums, internet, cell phone service, software subscription fees, bank fees, and loan payments.
- Variable Expenses: Other expenses may vary from month to month. An example of this would be an electricity bill that is higher in colder and warmer months or an increase in supplies and inventory during a busy holiday season. While these expenses fluctuate, keeping a budget can help you identify trends and calculate more accurate future financial projections.
- One-Time Costs: One-time costs are a little more difficult to add to the budget since these aren’t regular, recurring expenses. However, in some instances, you may be able to plan ahead and budget accordingly. For example, you may know that you need to replace a piece of equipment or purchase a new laptop in the near future. By budgeting for these one-time costs, you can set aside the funds needed to cover these purchases.
- Unexpected & Emergency Expenses: In business, expect the unexpected. Create a budget so that you have a cash cushion to cover unexpected and emergency expenses, such as a repair or equipment replacement.
Small Business Budget Categories By Industry
Your budget is unique to your business. The categories and numbers will vary based on how your business is performing and how your money is spent. But there are a few common small business budget categories that are used by businesses like yours. Let’s take a look at some of these common categories to add to your budget based on your industry.
If you operate an eCommerce business, many of the traditional costs of a small business — such as rent for a retail store — won’t be a part of your business. There are a number of other categories that will need to be part of your personalized budget, though, including:
- Web Hosting: Your website is one of the most important aspects of your eCommerce business. Web hosting fees will need to be added to your budget. Additional fees related to the operations of your website, such as annual domain registration and professional web design, are also costs to include in your budget.
- Shipping: All shipping costs should be tallied and added to your budget. This is, of course, a variable cost, but tracking your costs on a regular basis can provide you with insights and a better idea of what costs to expect in the future.
- Packaging: In addition to shipping costs, you’ll also need to consider the cost of packaging and shipping supplies. This includes boxes, padded mailers, envelopes, packing peanuts or bubble wrap, labels, and packing tape.
- Refunds & Returns: eCommerce business owners also need to add the costs associated with refunds and returns into their budgets. Do you cover shipping costs for the customer? This is an expense to add. Are there restocking fees or other fees that come out of your pocket? If so, these need to be calculated into your business budget.
- Software: Don’t overlook annual, monthly, or one-time fees for any software that you use for your business. This could include inventory management software, accounting software, cybersecurity software, and/or invoicing software, just to give a few examples.
- Storage Fees: Many eCommerce sellers utilize dropshipping and don’t have inventory on-hand. However, if you store and ship your inventory without the use of a third-party, add any inventory storage fees to your budget.
- Payment Processing: Payment processing fees paid for accepting online payments should be added to your budget.
If you operate a service-based business, you may have traditional expenses like payroll and supplies to add to your budget, as well as these costs:
- Transportation Expenses: If you travel to your customers or clients, the variable, fixed, and one-time expenses associated with your company vehicle should be added to your budget. This includes car loan payments, insurance premiums, annual registration fees, gas, maintenance costs, and repairs.
- Commissions: Some service-based businesses have employees that earn commissions. If this is part of your payroll structure, these costs should be added to your budget.
- Software & Subscriptions: If you pay fees for software or have subscription services used for your business, these costs are included in your budget.
- Payment Processing: Most businesses accept multiple forms of payment, and yours is probably no exception. Calculate your recurring payment processing fees and add these to your budget.
For owners of a product-based business, your budget may look a little different from other industries and may include costs such as:
- Research & Development Costs: If you create your own products, you may have a number of R&D costs from samples to design.
- Production Costs: Businesses that create their own products should add production costs into their business budgets.
- Inventory: You have to keep products in stock to make money, which means replenishing your inventory. All inventory costs should be added to your budget.
- Software: As with other types of businesses, calculate the costs of your business software (such as inventory management software or accounting software) into your budget.
- Shipping: If you ship domestically or internationally, shipping costs are an important part of your budget.
- Packaging: For businesses that ship products, packaging costs are an expense that should be included in a budget.
- Rent & Utilities: If you operate a retail shop, your commercial rent or mortgage and utilities should be put into your budget.
Whether you’re open year-round with fluctuations in sales or you operate only part of the year, here are some associated costs to add to your seasonal business budget:
- Permits & Licenses: Any business permits or licenses required for your business should be accounted for in your budget.
- Payroll: Seasonal businesses often find that payroll costs are extremely variable. In busy times, more employees may be kept on staff. During slower periods, staff members may be laid off to cut costs. Tracking and budgeting for these fluctuations can give business owners a better sense of their expenses, whether it’s in-season or not.
- Employee Training: Seasonal businesses often have to rehire new staff members during their busy seasons. Employee training and onboarding costs should be included in the budget.
If you’ve launched a startup, there are a number of fees and costs to track in your budget, such as:
- Business Licenses: Depending on the type of business you operate, you may be required to hold one or more different business licenses. Fees associated with obtaining these licenses are included as part of your budget.
- Legal Fees: At the very least, add in costs for registering your business, along with other legal fees you’ve racked up when launching your startup.
- Equipment: Equipment is a one-time cost that many startups require before launching. These expenses can be added to your budget now; you can also plan for repairs and replacements further down the road.
- Marketing: It takes money to spread the word about your business. Make sure to account for all marketing costs in your budget.
How To Create A Small Business Budget Step-By-Step
Now, armed with the knowledge of why a small business budget is important and what it should include, it’s time to take the next big step. It’s time to create a personalized budget for your business. Follow these steps to get started and to create a budget that works for your business.
Step 1: Identify How To Track Your Budget
You can certainly pull out an old notebook and start jotting down numbers. But there are better (and easier!) ways to create and track your budget. This includes:
- Spreadsheets: Use Google Sheets or Microsoft Excel to create your own budget spreadsheet. If you have experience with these programs, you can automatically set up calculations and perform other functions that make it quick and easy to track your income and expenses.
- Budget Templates: There are a number of budget templates available if you don’t want to start from scratch. Find one with a quick online search, or look for template options in your spreadsheet or word processing software.
- Accounting Software: Accounting software typically offers basic budgeting at the very least. Some accounting programs have advanced features and reports that really simplify budgeting. In addition, accounting programs often have other tools that are helpful for your business, such as inventory management, time tracking, and project management. Unsure of where to start? Check out our picks for the Best Easy-To-Use Accounting Software For Small Businesses.
Step 2: Gather Documentation & Information
Your business budget will consist of your income and expenses. For the sake of accuracy, the first step is to gather documentation and information that shows how much money is going into your business, as well as the amount going out. Guessing or estimating the numbers may leave you with more time, but it also creates a less-accurate picture of your finances.
To calculate your income, gather documentation including bank statements, customer invoices, copies of sales receipts, and financial statements. Your accounting software — if you use it — can be extremely beneficial in tallying up your income.
For expenses, get together documents including monthly utility bills, lease agreements, and loan contracts. Your bank statements and accounting software can also be helpful here for calculating your expenses.
Step 3: Identify Fixed, Variable & One-Time Expenses
In the previous step, you gathered information and documentation for your expenses. Now, it’s time to categorize those expenses. Start with fixed expenses.
As a refresher, remember that fixed expenses are expenses that are the same from month-to-month: rent or mortgage payment, loan payments, cell phone bill, car payment, and internet are fixed expenses. You receive a bill each month and make the same payment.
Variable expenses are expenses that vary from month to month. This includes supplies, inventory, electricity, gas, and water.
One-time expenses are expenses that aren’t recurring. Equipment purchases are a good example of one-time expenses.
Some expenses may differ based on your business model. For example, payroll expenses for a small business with an employee or two may remain fixed for a longer period of time. On the other hand, payroll for seasonal businesses or businesses that pay commissions based on sales may be categorized as a variable expense.
Step 4: Do The Math
It’s time to crunch some numbers! Start with the previous month. Add together all revenue streams to get your total income for the month. Next, total up your fixed expenses, variable expenses, and one-time expenses. Calculate each category separately, and then add the three numbers. Subtract this number from your total income. This leaves you with your profit (or loss) for the month.
Sound complicated? Let’s see this in action in an example:
- In-Store Sales: $5,000
- Online Sales: $1,000
- Total Monthly Income: $6,000
- Rent: $800
- Internet: $60
- Cell Phone Service: $80
- Insurance Premium: $200
- Payroll: $3,000
- Total Fixed Expenses: $4,140
- Electric Bill: $150
- Water Bill: $70
- Supplies: $50
- Inventory: $250
- Total Variable Expenses: $520
- New Laptop: $600
- Total One-Time Expenses: $600
Now, let’s take these expenses and add them together.
Fixed Expenses + Variable Expenses + One-Time Expenses = Total Monthly Expenses
$4,140 + 520 + 600 = $5,260
Your total income for the month is $6,000. Now, subtract the total expenses of $5,260 to get profit.
Income – Expenses = Profit
$6,000 – $5,260 = $740
For the month, you made a profit of $740.
You can continue this process, working back through each month to get an idea of your monthly expenses and income. By gathering this historical data, you can see key facts and figures such as slow periods when revenue is down and areas to cut costs. While not an exact science, this better prepares you for future planning and reaching your financial goals.
One last thing to note: Even the most organized budget can be impacted by an unexpected expense. Make sure to set up an emergency fund to account for these events. You can also look into options like business lines of credit or business credit cards to provide an extra cash buffer for these expenses that you just can’t plan for.
Step 5: Cut Costs
With a few months under your belt, it’s time to look over your data and determine if your business is financially sound and on the right track. If not, now is the time to identify any potential issues.
Let’s go back to the example we used in the previous step. You spent money on inventory, but sales were down significantly during this month. When reviewing your data, you realize that sales have consistently been down during this same month each year. In the future, you may decide not to purchase additional inventory during this month.
You can cut costs in other ways, too. Your cell phone service is currently priced at $80 per month, but you negotiate with your carrier to drop the cost to $60 per month. Your insurance premium is $200 per month, and your insurance agent doesn’t have more affordable options. In this example, let’s say you shop around and find a provider offering comparable insurance for $150 per month. Though it seems minor, these savings can add up over time, boosting your profitability.
Step 6: Plan For The Future
Use the historical data you’ve gathered to plan for your future. If you’re consistently in the red (or not bringing in the income you need to expand your business), ask yourself what changes you need to make. If you operate a seasonal business that doesn’t bring in much money during the summer, does it make sense to keep your store open? Maybe it’s more cost-efficient to close your store or bring your products/services online during these slow periods. Or maybe you need to ramp up your marketing campaign to reel in new customers.
If your income looks pretty good after deducting expenses, is there something you can do to take your business to the next level? Does it make sense to upgrade or add equipment to better serve your customers? Would your business benefit from an extra employee? Now is the time to evaluate the needs of your business, look at the financials, and determine your next steps.
Step 7: Stick To Your Budget
A budget is nothing but a piece of paper (or spreadsheet) if you don’t stick to it. Watch out for overspending, cut costs where necessary, and adjust your budget as needed to account for any changes in your business.
Let’s face it: budgeting definitely isn’t the most fun task to tackle in your small business. But taking a bit of time to budget comes with big benefits. By taking a closer, in-depth look at your income and expenses, you can have a better idea of what changes need to be made within your organization. You can also use this data to plan for the future … hopefully, a future that’s successful and profitable. Good luck!