Budgeting is a necessary exercise for businesses of all sizes, so whether you’re a gig-economy sole proprietor or a regional business with multiple offices, you’ll want to take the time to ensure your budget practices are good to go. In order to accomplish this, it’s vital to first understand what goes into a budget, the role a budget plays in the life of your business, and the various components that make up a good budget.
First, let’s talk about what a budget is. A budget is more than just a record of where your business’s money is and what that money is doing; it’s a plan for how to best manage your money. Think of your budget as a road map for your business, containing all the possible routes to all the destinations you may wish to get to. It’s a tool for planning future activities and goals, rather than a way to track every penny that moves through the system.
With that in mind, what makes a good budget? And more importantly, what makes a good budget for your business? Here it’s important to take two things into account: the unique character and needs of your business and the industry standards within your particular field of endeavor. You’ll have to address the former on your own, but for the latter we suggest speaking to other, similar businesses, reaching out to your state revenue agency and the IRS, and consulting financial professionals. These sources can help you understand both what is expected of a business of your type and perhaps more importantly what will work best for you.
Next, you’ll likely want to break down a list of your expenses and see where your costs are. The cost of doing business determines many of your business activities, so it’s generally the place to start. While there are many kinds of business expenses—fixed costs, variables costs, overheads, and the like—there are a few common ones most businesses share:
- Rent or mortgage on the premises or facilities
- Staff costs: wages, taxes, benefits, etc.
- Utilities, including power, heating, telephone, internet
- Data storage, be it for a server, a cloud backup, or your website
- Media and promotional costs
- Vehicle and equipment cost
- Insurance for the facilities, vehicles, equipment, personnel, and liability
- Travel expenses
- Office or professional supplies
Again, your business is unique and you may have expenses not listed here, so take those into account. Tracking your expenses is important as these are often the best ways to save money. Don’t be afraid to shop around for a new vendor, provider, or insurer—the cost savings over time add up significantly. This is part of the reason it’s best to be detailed and specific in your expenses; it helps with future planning.
Next, you’ll want to look at your business cash flow. This includes both expenses and incoming money be it from sales or from investors, although those two must be handled very differently. Understanding where the money’s coming in and how that compares to your costs is how you determine the next steps for your business, eg how do you shift the cash flow in your favor. This is where your business’s unique needs, position in the marketplace, and location all come into play; sometimes the intangible affects the budget as much as the quantifiable.
The question almost always comes up as to which budget tools are best for a particular business. This varies widely—some small businesses with the right skills can do it all on an Excel spreadsheet, others use purpose-built accounting software. Some rely on a professional accountant in-house, and some outsource their accounting and tax needs. As our tax and financial landscapes are rapidly evolving at present, there’s a strong trend of businesses of all sizes seeking expert help from financial professionals in both their accounting and their business/financial planning. This sort of guidance can make the difference, freeing up time and energy in the house while getting you the best results possible.
There’s one small but important step in any budget, which is often overlooked by businesses of all sizes: flexibility. Building in some wiggle room can help you adapt to sudden or unexpected changes, be they a shift in the market, an unexpected opportunity, an in-house emergency, or a natural disaster. Having some money available can help you sail through the changes, be they good or bad.
To close, your budget is a powerful tool for your business and a key step in your business planning and growth. We hope you’ll find this helpful as you move forward.