If you’re looking for information on how to create a business budget, you’re in the right place. In this article, I’m going to:
- Answer common questions you might have about business budgeting
- Tell you what needs to be included in a business budget
- Give you step by step guidance on how to create a business budget
- Show you examples of line items in a business budget to help you apply these tips a little easier
- I’ll tell you about tools that make budgeting easier
- I’ll direct you to some additional resources for those who may want to brush up their skills even more on the topic of budgeting.
If that sounds good to you, let’s get started…to see this content in video, check it out here:
Successful Businesses and Budgets
You may have seen the entrepreneurs who look like their businesses are going so well. Their revenue is growing, they pay themselves well, and they seem to be very happy as a result.
On the other hand, there are the other businesses that never pay things on time, have bill collectors calling them nonstop, can’t keep employees because of complaints about payroll being done wrong, they get late fees all the time, they pay double or triple what they should on products and services they purchase (due to bad credit and late payment), and oftentimes, they even get shut down because of their disorganization with the finances.
What you may not know is that in order to get those ideal results, one practice successful businesses implement is business budgeting. Either the business owner or someone in the company has to take time and do the math to track where money is coming from and where it’s going out.
Whether you like math or not, every entrepreneur is going to run into math in some way or another. You have to set prices, plan how many sales you’ll need, calculate your operating expenses, measure your lifetime customer value, and so much more! It’s nearly impossible to stabilize and grow a business without budgeting.
After attending several events and doing lots of research to find out what main concerns entrepreneurs have, I’ve been able to see 3 very common questions, and I want to start this business budgeting conversation out by answering those.
What should you include in a Business Budget?
These are the most important components that should be included in your business budget:
- Income sources
- Fixed Expenses
- Variable expenses
- Working Capital
- One-time Spends
- “Just in Case”
What do I do Before I have a Pattern?
Many entrepreneurs struggle with identifying how much they should be spending on materials, equipment, payroll, and other operating expenses. They also struggle with identifying how much income to expect because of the inconsistency that is normal for various phases in business growth.
I think we all hit these patches.
Before there’s a clear pattern, it’s important to network, find comparable businesses, and find a mentor to get an idea of what their patters were and what they did to stabilize the business. With experienced advisors, you can get insight that lets you know better what to expect.
Similar to the previous question, you’d connect with others and share ideas. I also have more tips for how to identify appropriate operating expenses in my post What are Operating Expenses? here.
Now, let’s break it down into a step-by-step format, so you’ll know how you can apply all of this.
9 Steps to Create a Business Budget
Budgeting in business is very similar to budgeting for a household. If you’ve done a budget for your personal finances, business budgeting should come a little easier. If not, it might be a little more of a learning curve, but when it’s not done, it’s much easier to get sidetracked or distracted.
Budgeting is a way to make sure the financial priorities are taken care of in order, and other things are done in a way that gives precedence to the business health. Here are 9 steps to create a business budget that makes sure the priorities are taken care of, and the business finances stay healthy:
Step 1: Determine Income Sources
You may have one large contract that provides your business with income, or you may have several small contracts. Whatever is your circumstance, you want to tabulate all of your business income and use it to do your budget.
Step 2: Determine Fixed Expenses
These are expenses where you pay the same price at set frequencies. Some examples include:
- Monthly rental expense
- Loan payment
- Or, recurring operating expenses
Step 3: Determine Variable Expenses
These are expenses where the prices fluctuate.
- Credit card payments
Step 4: Include Savings for Working Capital, One-Time Spends, and “Just in Case”
Maybe you have plans to purchase a major piece of equipment, to get licensing, to purchase a building, or some other expense that will only take place once. Added to that, you also need to remember that things don’t always go as planned, and as an entrepreneur, you have to be prepared for “rainy days” by setting aside money for it.
Step 5: Put it all Together — Profit & Loss
Once you have all of your income and expenses together, it’s time to do the math. You have to subtract your expenses from your income to see how much you’ll have left. A positive balance means you have profit! A negative balance means you may need to cut some expenses (unless you have a backup supply of money somewhere).
Step 6: Make Projections to Stabilize or Improve the Business in the Future
Once you start seeing a pattern of your income and expenses, it’ll be easier to make projections. You’ll start to gain confidence in how well you can sell and approximate reasonable sales volumes based on your performance. Added to that, you’ll gain more and more familiarity with your expenses, what things should be invested in to improve the business performance, and hopefully, you’ll also stabilize a consistent investment into the business savings and growth as well.
Step 7: Stick to the Plan
A business budget can be a complete waste of time if the people inside of the business won’t maintain the discipline to follow thru. You have to remember to follow thru and do what’s necessary to fulfill what you’ve written. Don’t fall into the trap of experimental spending or shiny object syndrome. Make sure to write the plan and stick to it.
Step 8: Compare Projections and Actuals
Projecting is planning based on patterns within your business or patterns in your industry. When you forecast your sales, income, or expenses, make sure to go back and write in the actual results. This practice will help you set goals about your performance, then see what happens in reality.
Step 9: Analyze Trends and Improve in Financial Planning with Practice
With time, the practice of projecting, then analyzing your actual performance will help you to see what’s really possible, where you may need to improve, and what weaknesses you might have. Use the real data to make more realistic and attainable goals.
Tools to Make Business Budgeting Easier
The tools I recommend to make your business budget, profit and loss statements, and keep track of your income and expenses are:
- Freshbooks – For smaller teams and freelancers. See my full Freshbooks review here or get started with a free trial here.
- Quickbooks – For businesses of various sizes. See my full Quickbooks review or get started with a free trial of Quickbooks here.
- GSuite – GSuite can be used to make spreadsheets and to collaborate on them. See my full GSuite review or try out GSuite here.
Sources for More Information on Business Budgeting
If you’re looking for more information on Business Budgeting, I recommend you check out this class or others like it on Udemy. It will walk you thru each component of the business budget and how to do it:Check out the Financial Planning & Analysis course on Udemy by clicking here.
Once you implement the practices of business budgeting, you’ll notice so much more clarity and organization in your business. You may not start off good at it, but with time and practice, you’ll get better at it, and it will positively impact your business. For more advice and tips to grow your business: from idea to enterprise, check out my Business Growth Framework e-course and 7 days of free coaching by clicking here.