Creative people and entrepreneurs are great at coming up with new ideas. But unfortunately, we’re not so great at the details of running a business . . . you know, “details” like making a business budget.
If you get excited by stuff like this, more power to you! Personally, it makes my eyes cross. Whether or not numbers come easily to you, the good news is you can learn the skills you need to make a solid budget and manage the finances of your business with confidence.
What Is a Business Budget?
A business budget is a plan for how you’ll spend the money that your business generates. You anticipate what’s going to happen in the near future with your expenses, revenue, and profit, and decide beforehand what to do with the profit.
I love how leadership expert John 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?
You need a business budget for many reasons, but the most important one is that your business won’t survive without one.
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Think I’m being dramatic? Get this: Get this: There are 31.7 million small businesses in the United States. (That’s a lot of small businesses!) Out of the small businesses that opened from 1994 to 2018, 32.4% of them closed within their first two years. And only half of small businesses survived after five years.1 That means if you and a competitor open up shop at the same time, chances are that one of you won’t be around in five years.
If you want to be one of the businesses that sticks around, you’ve got to manage your money well. If you don’t have control of your cash flow, you’ll spend more than your business is earning, be tempted to take on debt, and have a hard time fulfilling your promises to your customers and team members.
The second main reason to create a business budget is for peace of mind. 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. But budgeting will help you stay in control, which lowers your anxiety and stress levels.
How to Create a Business Budget in 10 Steps
While you can (and should) budget for each year and each quarter, we’re going to talk about making a monthly budget. This is the easiest way to plan in detail without getting too much in the weeds.
Here are the most important steps to follow as you create your business budget:
1. Keep your personal and business budgets separate.
Things always get messy when you mix your personal funds with your business. Keep it clean by having separate accounts and budgets for home and work.
2. Choose your budgeting tool.
As you scale, you’ll probably want to use a small business accounting software. But if you’re just starting out, you can be scrappy for now.
3. Total up your projected monthly revenue.
Next, ask yourself: How much money will my business earn next month? Just like you start your personal budget with your income, you’ll start your business budget with 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, look back at last year to see what you can expect to make this time around. If you’re just starting out, you’ll make an educated guess about what you think you’ll earn in the upcoming month.
4. Brianstorm all your projected expenses.
It’s crazy how much money can slip between the cracks when we’re not careful about putting it in the budget. Think through all of your business expenses, down to the last paper clip. I’ve got a list 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 repair
- Transportation expenses
- Payroll (this doesn’t include your paycheck—more on that later!)
- Employee benefits
5. Arrange your expenses by category.
Once you’ve got your big list of expenses, it helps to break them down into categories. Categorizing your budget will keep you from feeling completely overwhelmed by all those numbers.
One option is to group your expenses into these three categories:
- Fixed costs: These are the predictable items you know you’ll need to pay every month, like rent or insurance or subscriptions.
- Variable expenses: Some expenses fluctuate from month to month, like shipping costs or utilities. Also, there might 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. Maybe you need to replace a piece of equipment, or you want to buy a ticket to attend a conference. Look ahead each month to see if you’ll need to set aside some extra money.
6. Calculate your gross profit.
Okay, this is when we start to do some accounting. Technically, accounting is done on the back end of your expenses—it helps you revisit your spending and make sure you hit the goals you set for yourself. But it’s a good idea to plan ahead for how you’ll account for every single dollar that you spend and make in your business.
Hang with me—we’re about to do some math! Take your gross revenue from step three (the total amount of money you expect to make this month) and subtract the cost of goods sold to find your gross profit.
What do I mean by cost of goods sold? These are the expenses directly related to producing your product or service. For example, let’s say you make monogrammed baby gifts. Your cost of goods sold would include the supplies (like thread, needles and fabrics) 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. We’ll get to those when we talk about operating expenses.
Here’s where we are so far:
— Cost of Goods Sold
7. Subtract the rest of your expenses from your gross profit to find your net profit.
Now we’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 actual number that your business 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 go on a shopping spree just yet—there are a few more steps to take.
8. Divide your net profit four ways.
Now you’re going to take your net profit and divide it four ways:
- Taxes: You’re going to owe the IRS, so be ready! 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. If you haven’t already, I strongly suggest you meet with a tax professional to create a specific plan for your business.
- Emergency fund/savings: An emergency fund is absolutely essential for running a successful business. Think of this as a buffer between you and life. Let’s say your work laptop quits working. You can use your emergency fund to replace it! I recommend saving up three to six months of operating expenses in your emergency fund—so you’ll need to save aggressively early on.
- Upcoming expenses/reinvestment: 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 a new machine), set aside money in the months leading up to that purchase.
- Paycheck: Here’s the fun part: Whatever’s left is yours! As the business owner, you’re the last to get paid. If you’re bringing home a lot of money, this is a great thing. If things are tight (as they usually are in the early stages of a business), you might not be making much. Hang in there. If you keep applying these budgeting principles and growing your profit, you’ll start to see the rewards.
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 executing 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 incorrectly, or just blow it altogether. Don’t give up. It takes a few months to get the kinks worked out. So keep trying, keep budgeting, and keep coming back to it. It’ll be worth it in the end!
Make Money Doing What You Love
I’m not a numbers person, but I’m super passionate about business. If you’re feeling intimidated by the technical side of things, hear me on this: Don’t wait until you’re ready, certain or perfect. Just take the next step.
And if you’re looking for ways to grow yourself and your business, I invite you to check out the Business Boutique Academy. It’s an incredible community of women making money doing what they love. You’ll get access to hundreds of training videos, tools, resources and monthly live coaching calls from me. See if the Academy is right for you!