What to Consider When Building Your First Small Business Budget
by Sandy John
Building your first small business budget can be difficult because you’re dealing completely in estimates, or guesstimates. However, it’s worth putting in the time, effort and research required to create a budget, because it’s a tool to help you track and control your finances. A third of small businesses that fail say that it’s because they run out of money, so keeping your finances on track is essential.
Budgets track income, or the money coming into your operation; and expenses, or the money going out. The sources of income and expenses can vary widely, depending upon the kind of small business you’re starting. Consult other small business owners and service providers such as accountants to get an idea of what costs your small business should budget for.
Startup costs are one-time costs for things you need to get the business going. These could include:
Notice that the above list doesn’t include your salary. Until you receive funding or start bringing in revenue, don’t expect a paycheck for yourself. While startup expenses will likely outpace your revenue in the early days of the business, you should have a plan for when you’ll start to break even and reach profitability.
Monthly expenses are things you have to pay for every month, or every year. Set as many recurring expenses as possible up with autopay. That will help you protect your business credit, and make sure you don’t get slapped with late fees. Plus, it will free you up to work on your business, rather than worrying about bill payments.
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Items you might need to budget for include:
Expenses are further broken down into two categories: cost of goods sold, or the cost of sales, and operating expenses, also called overhead or fixed costs.
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The cost of sales are expenses that are directly related to producing the product or service you sell. That includes the inventory or raw materials you need and the salaries of the people who make and sell the items. As you sell more of the product or service your small business offers, your cost of goods sold will go up, because you will have to buy more raw materials and possibly pay more people to make your product. Your small business budget should account for the rising cost of sales when you forecast that you’ll sell more, and plan to grow at a sustainable pace that allows revenue to catch up to expenses.
Overhead, or fixed expenses, include all the things that aren’t directly tied to production but that you need to keep your business running — rent, loan payments, marketing costs, for example. They shouldn’t vary much no matter how much product you produce.
No matter how carefully you’ve planned for expenses, leave some wiggle room for unexpected expenses that inevitably crop up, whether it’s a higher-than-anticipated tax bill or entry into a must-attend trade show.
Income is any money that’s coming into your business, primarily from the sales of whatever product or service you offer. Income is harder to estimate than expenses – after all, there’s no way to know when you’ll start getting customers.
Also consider whether you will be paid immediately or if there is time between when you complete the sale and when you receive payment. Your budget must also account for any expected seasonal variations in sales.
For your initial small business budget, estimate on the high side when considering expenses you’ll encounter and err on the low side when estimating income to be sure you’ll have enough money to operate. As your business progresses, compare actual monthly income and expenses to the estimate you used in the budget and fine-tune your budget to better reflect how your business is performing.
Once money starts coming in, keep it in a dedicated business bank account. Keeping your business and personal finances separate will help you at tax time and also make it easier for you to evaluate the financial position of your company. Have a process for sending out invoices and following up on them if they haven’t been paid.
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