Entrepreneurs are idea generators on steroids. They’re risk takers, visionaries and motivated mavericks. But getting them to nail down the details of running a business can be like trying to nail Jell-O to a tree. The thing is, your business can’t run unless you carefully handle priorities like creating your business budget. In fact, bad accounting is the main reason many small businesses fail.
If you’re a small-business owner, you know firsthand that every penny counts. That means you need to count every penny that comes in or goes out of your company! When you run your business on commonsense financial principles, you’re setting yourself up to be like the little pig who built his house out of bricks, not hay or sticks.
And the other really good news? You don’t have to be a numbers and spreadsheets person to build the skills you need to make a solid business budget and manage your company’s finances with confidence.
What Is a Business Budget?
A business budget is a plan for how you’ll spend the money your business generates—every month, quarter and year. It gives you a roadmap for predicting and tracking expenses, revenue and profit. It also helps you decide what to do with business profit, when and where to cut spending and grow revenue, and how to invest for growth when the time comes.
Stop doing business as usual! Lead your team, grow your business and create a world-class culture with EntreLeadership Elite. Start your free trial now.
Leadership expert John C. Maxwell sums it up: “A budget is telling your money where to go instead of wondering where it went.”
Why Do I Need to Budget for My Business?
Your business won’t survive without budget. It’s that simple. Sound dramatic? Check this out: There are 32.5 million small businesses in the United States. Out of the small businesses that opened from 1994 to 2019, 32.4% of them closed within their first two years. And only half of small businesses survive after five years.1
The main reasons these businesses went under? They didn’t start with enough money in the bank, missed their revenue projections, didn’t pay their quarterly or payroll taxes, and hit the wall with cash-flow problems. But you can do better than that just by applying a handful of important money principles:
- Control your cash flow.
- Spend less than your business is earning.
- Move at the speed of cash (aka no debt).
- And (you knew it was coming) actively follow a budget to do all of the above like a financial ninja.
As a business owner, one of the worst feelings in the world is wondering whether you’ll be able to keep your doors open—and money problems are almost always at the heart of that fear. We can’t say it enough: Budgeting helps you stay in control. And staying in control keeps you from feeling stressed out and freaked out. So if you want more business peace of mind, create a business budget.
How to Create a Budget for a Small Business in 10 Steps
While you’ll eventually need to create annual and quarterly budgets, just start small for now. Try setting up a monthly budget and making that a keystone habit (aka a habit that helps kick-start other habits). This is the easiest way to stay out of the weeds but still crush your goal of controlling your finances.
Here’s how to create a business budget:
1. Keep your personal and business accounts separate.
Things always get messy when you mix your personal funds with your business funds. Keep your records clean by having separate accounts and budgets for home and work. You don’t have to form a legal corporation or get a tax ID number to create your business account. You can open a simple sole proprietorship account in the DBA (doing business as) for using your social security number.
Pro tip: Deposit every single dime of your business income into your business account. Never pay any personal expenses from this account. And only pay business expenses from this account. In other words: Don’t use your personal account to pay business expenses, and don’t use your business account to pay personal expenses. Not only does this keep you organized, but it also lets you see if you’re profitable.
2. Choose your budgeting tool.
Decide where you’ll keep your budget—whether that’s in an app like EveryDollar, an Excel file or accounting software. And as your business gets bigger, it’s a good idea to get guidance from a tax advisor. You’ll need a tax preparer or CPA to make a profit and loss (P&L) statement for you. This statement is just a way to look in the rearview mirror to see what happened in the last month, quarter or year. But since it can’t tell you what’s going to happen in the future, you’ll need to start with a business budget to help you look forward.
3. Total up your planned monthly revenue.
All a budget does is predict income and expenses so you’ll know where you’re at with profits. Just like how you start your personal budget with your income, you’ll start your business budget with business income (also called revenue). Your revenue is the money you earn in exchange for your products or services.
If your business has been making money for a while, use your P&L statements to look back and project what you’ll expect to make month over month. And if you’re just starting out, you’ll have to make an educated guess about what you think you’ll earn in the upcoming month.
4. Brainstorm all your projected expenses.
It’s crazy how much money can slip through the cracks when we’re not careful about putting it in the budget. Think through all your business expenses, down to the last paper clip. Here’s a list of common expenses to get you started:
- Cost of goods/inventory
- Rent and utilities
- Phone and communication services
- Marketing and advertising costs
- Office supplies, shipping and postage
- Legal fees
- Maintenance and repairs
- Transportation expenses
- Payroll (this doesn’t include your paycheck—more on that later!)
- Employee benefits
- Acts of generosity to your team, customers and community
5. Arrange your expenses by category.
Once you’ve got your big list of expenses, it helps to break it down into categories. Categorizing your budget will keep you from feeling overwhelmed by all those numbers.
One option is to group your expenses into these three categories:
- Fixed costs: These are the things you know you’ll need to pay for every month, like rent, insurance or subscriptions.
- Variable expenses: Some expenses change from month to month, like shipping costs or utilities. And there might also be seasonal expenses to consider—like more inventory purchases to gear up for the holidays.
- One-time purchases: One-off expenses will pop up now and then, for example, replacing equipment or attending a conference. Look ahead each month to see if you’ll need to set aside some extra money.
6. Calculate your gross profit.
This is where we start to do some basic accounting. To put it simply, accounting is done to analyze income and expenses so that you know where your money went and whether you have a loss or profit. It’s your chance to look back at your spending to see if you hit the goals you set. So, using accounting can help you figure out exactly how much you’re spending and making in your business. (You could use simple Key Performance Indicators to help you track your goal progress.)
Now, number nerds and number haters alike—buckle in. We’re about to do some math! Take your gross revenue from Step 3 (the total amount of money you expect to make this month) and subtract the cost of goods sold to find your gross profit.
What is the cost of goods sold, you ask? It’s the expenses directly related to producing your product or service. Let’s say you build and install cabinets. Your cost of goods sold would include the supplies (like wood, stain and hardware) and labor required for you to produce your products. Cost of goods sold does not include indirect costs—like rent or insurance or marketing expenses. You’ll tackle those with operating expenses.
So here’s where we are so far:
— Cost of Goods Sold
7. Find your net profit.
Now you’re ready to find your net profit—or what’s referred to as the bottom line. Total up the rest of your upcoming expenses for the month and subtract that number from your gross profit to find your net profit.
— Cost of Goods Sold
— Operating Expenses
Your net profit is the money your business actually makes at the end of the month. You can think of your net profit like a report card: It helps you measure the success of your business.
But you can’t pocket that profit just yet. You’ve got a few more steps to take.
8. Divide your net profit.
In this step, you’re going divide your net profit into multiple buckets:
The IRS is standing by to “help” you meet your tax obligation, so be ready! If you don’t keep an eye on your taxes, your business will fail. How much you’ll owe depends on how much you make, but a good rule of thumb is to set aside 25% of your net profit for taxes. You might even want to create a separate bank account to stash your tax money just to make sure you don’t overspend. And if you haven’t already, consider meeting with a tax professional to create a specific plan for your business.
Pro tip: When you collect sales tax, don’t spend it. You’ll find yourself in real trouble if you do.
An emergency fund is essential for running a successful business. Think of this as a buffer between you and life. Whether your business laptop fries, your delivery van dies, or a vacuum cleaner nicks and short wires your copier cable, your emergency fund is there for you. Save the equivalent of three to six months of operating expenses for your emergency fund. To do this, you’ll have to start saving (and we mean really save) as soon as you can.
This is another chunk of savings but with a more specific purpose. If you know you’ve got a bigger out-of-the-ordinary expense coming up (like hiring a contractor or investing in new equipment), set aside money in the months leading up to that purchase.Also, the way to grow your company without debt is by designating some of your cash for future growth. This savings could go toward launching a new product, taking a calculated growth risk, or jumping on a deal that pops up out of the blue.
Finally! Whatever’s left is yours. As the business owner, you’re the last to get paid. If you’re making bank, congratulations! Enjoy your hard-earned money. But if things are tight right now (as they usually are in the early stages of a business), hang in there. If you keep following these budgeting principles and growing your profit, you’ll start to see the rewards.
Now for some real fun. One of the most amazing perks of running a profitable business isn’t getting but giving! Be generous with your products, services and profits along the way. Constantly live out a spirit of generosity and encourage it in your team. That’s the hallmark of people who live successful lives and who operate business with soul.
Pro tip: No matter who you want to impress or how much you think you can justify buying new toys (for your business and otherwise), hold off until you’re consistently making lots of money and having plenty of margin. Buying shiny objects and tempting gizmos and gadgets you don’t really need can wreck your momentum.
9. Review your budget consistently.
It’s one thing to make a plan and another thing to stick to it. After you’ve set your budget for the month, have daily or weekly check-ins to make sure you’re actually following it. At the end of the month, go back and see if you went over in one category or didn’t spend as much as you thought in another. You can adjust those numbers in next month’s budget!
10. Don’t give up.
When you’re new to budgeting, it can be frustrating when you mess up, guess wrong or just blow it altogether. But don’t give up. You’ll need a few months to get the kinks worked out. So keep trying, keep budgeting, and keep coming back to it. Before you know it, telling your money where to go will build your confidence and help you make business decisions that keep you on mission!
Remember: It’s okay if you’re a little intimidated by accounting and making a budget for business. But it’s not okay to avoid the financial details that will make or break you. So take your next step in budgeting by applying the basics we just covered.
Looking for a playbook that’ll walk you through all things business related—including budgeting for business and developing as a leader? Check out EntreLeadership. In this book, #1 New York Times bestselling author Dave Ramsey walks you through everything you ever wanted to know about how to develop as a leader and build your business.