Creating a budget can be one of the most difficult parts of running your own business, but it’s also one of the most important—and once you get into the habit, it can be easy to stick to and even fun to watch your small business grow with each month that passes. If you want to create an effective budget for your business, keep these ten tips in mind!
1. Think About Revenue, Expenses and Payroll Costs
2. Set Financial Goals
When you create your business budget, start by setting financial goals and benchmarks. How much do you want to spend on staffing? Insurance? Taxes? These are all questions that need answers when creating a business budget. Once you have these goals in mind, figure out what your profit margin needs to be to meet those goals.
If your goal is $1 million in revenue, but your costs add up to $950K, then you need to make sure that amount of money over and above all of your expenses equals $50K (or some other amount) in profit. For example
3. Understand How Cash Flows Through Your Business
Understanding how cash flows through your business—and where it all goes—is essential to long-term financial success. Here’s a simple way to think about money in your small business: Cash flow is like water; if it stops flowing, you’re dead. You need cash to pay bills, run payroll and grow your business. And if you don’t have enough coming in, or too much going out, you’ll eventually go under. No one wants that!
So let’s look at ways to keep cash flowing freely and easily through your company so you can succeed without drowning financially.
4. Record Income on Cash Flow Statement
Recording income on your cash flow statement is a foundational principle in small business accounting. Simply put, every time you accept money, it must be recorded on one of your financial statements. Money-in = Income (on Cash Flow Statement).
And if you don’t follow that rule, how can you know how much money was actually coming into your business?
It is pretty straightforward, but it is also important to make sure that everything gets correctly entered because often times, people tend to neglect doing so due to lack of discipline or because of procrastination. If you find yourself doing so as well, make sure that you implement some sort of software program which will help guide and keep you accountable on where all your money goes.
5. Track Total Assets & Liabilities
6. Record Income and Expenditures Monthly
To create a good budget, you need to first keep track of your business’s income and expenditures on a monthly basis. If your business has one bank account, use that as your ledger. If it has multiple accounts (for example, one checking account and two savings accounts), go with whichever of those three is most convenient for you.
Track each expense and income separately: when you record an expenditure, enter it in its own line item on your spreadsheet.
For example, don’t combine all of your office expenses into one item; instead, track rent/mortgage separately from utilities separately from payroll and everything else. When it comes time to tally up how much money you made or spent in total last month, add all items together rather than trying to figure out what percentage went where.
7. Check Your Net Worth Monthly (end of month is best)
Businesses have many moving parts, and your finances should be no different. You need to monitor your income and expenses regularly to make sure that you’re on track with what you want your business to accomplish.
Check out How To Create a Personal Financial Statement for help creating personal financial statements. They’re just as important in a small business as they are in individuals, because it allows you to watch over how money is coming in (and going out). A solid small business budget also includes a spending plan at least 3 months in advance.
8. Review Financial Projections Monthly
9. Run Payroll
Payroll isn’t just about getting paid; it’s also an accounting function that comes with its own set of unique challenges. Most importantly, when you run payroll you need to file your company’s tax forms and make sure you don’t overpay your employees or underpay your taxes.
Payroll is usually outsourced, but some companies choose to handle it in-house—it can be done either way, but remember that you’ll have to have a full understanding of federal and state laws before you decide to handle payroll yourself. If anything seems daunting, consider outsourcing it. It’s often easier (and more affordable) than you think.
10. Use Accounting Software To Automate Processes
If you’re using accounting software, having it set up to automatically log all purchases and deposits can save you an enormous amount of time on bookkeeping tasks. You may also want to use third-party applications like QuickBooks or Freshbooks to help make your business more organized and efficient.
These applications allow you to manage your company’s finances from anywhere with an internet connection so there’s no need to worry about losing track of transactions. This software can be synced with traditional accounting programs if needed. And don’t forget, if you’re ever unsure how much something should cost, don’t be afraid to consult a professional accountant who can help figure out what is best for your business!
Accounting isn’t always simple but being organized will save you time in the long run.