When you’re running a small, local business, budgeting is crucial. Managing your revenue and cash flow is critical to your long-term success, but you still need to keep the lights on and make sure your office and employees have what they need to get their jobs done.
Budgeting doesn’t have to be complicated or difficult. Here are a few simple tips you can use to start budgeting for your business.
Why You Need a Budget
When you first start your business, you probably don’t have a budget at all. You spend as little as possible and try to get as much as possible done to start bringing in money.
However, if you do things right, sooner or later, your business will start to grow. You will hire more people. Maybe you’ll move to a bigger premises or buy more vehicles and equipment. You will probably take out financing on some of those purchases and have to make monthly payments.
A business budget not only tells you what you need to pay every month, it also tells you what you need to make. It also helps you to calculate accurate pricing and make any financial projections you need to do. Over time, your past budgets can also help you to predict what you might be spending in future – and how your costs and profits might vary by season.
All of that helps to make financial planning in the short, medium and long term a lot easier.
Fixed Versus Variable Costs
The first thing you need to know is that there are two general kinds of expenses your business will have: fixed and variable.
Fixed costs are things that you know you will be paying the same amount for every month – like the rent for your office space or the repayments on a vehicle. These costs are usually the same every month, so they’re easy to include in your budget.
Variable costs are not so easy to predict because they often vary according to how much work you have to do. These could include things like wages, consumable products like stationery and office supplies, raw materials, petrol and so on. You might be able to predict roughly what they will be every month, but you can never say with absolute certainty.
Build In Some Padding
Because there are costs that you can’t estimate or predict with absolute certainty, your budget should never be calculated to be too close to what you think you will spend.
Always make sure that you build in a little padding. An extra 10 to 15% set aside for costs should cover you against any surprise costs that you might otherwise not be able to cover.
Creating Your Budget
Creating a business budget doesn’t have to be very difficult. You already keep track of what you spend in the form of receipts and invoices. Spend some time adding up what you spend on different kinds of things in the average month and create a list of the things you spend on.
This could include things like rent, utilities, tools and equipment, wages, office supplies, vehicles, fuel and so on.
Calculate the totals for each of those things over the course of a few months. You will probably start to see that there is a pattern. It’s likely that you spend similar amounts of money on each type of thing every month. Remember to include things like professional memberships and licenses you need to operate your business. If you have annual costs, you can divide them by twelve to include a portion in each month’s budget.
Next, create a spreadsheet where you list all your budget categories, and an estimated amount for each, based on the costs you’ve calculated from your actual payments. At the end of the month, check that your actual expenses are within your budget, and if not, adjust it slightly until it’s accurate for each category.
As your business grows, your accounting and budgeting will become more complex, but right now, it really can be this simple.