BUDGETING FOR SMALL BUSINESSES
I’m a creative, but I am also a total nerd. I love math, science, and numbers. It wasn’t until I started managing my business finances that I realized I actually get a kick out of balancing our books. Finances can feel scary to navigate but they don’t have to be!
I’m writing this post to help you better understand small business finances so you can put plans into place to protect your business and yourself. This will also help you establish a strong foundation of understanding your business + personal finances.
FIGURE OUT YOUR OPERATING COSTS
•Write down your “Fixed Goods” – these are the expenses that do not change from month to month. You can easily do this by going through your bank statements. I want you to take a piece of paper and write “fixed goods” on it. Literally write them down in a list. Write out what it is and the amount next to it. My hope is that you’ll find you’re only spending money on things your business really needs. If you’re on the fence about an expense – evaluate it. Is it necessary right now? Does it help me make money? Does it enhance my brand? If you’re spending money on something that isn’t serving your business, now is the time to evaluate cutting back.
•Variable Costs – after you’ve been in business for a while you’ll be able to estimate these as in “I spend X amount on marketing on average per month”. Maybe it’s more during slow months, and less during busy months. Do your best using your bank statements to determine these. Write them down! You’ll be able to come up with an overarching average for the year and divide it by twelve.
•Predicting one time / annual expenses – factor these in to your overall budget. For example, my general liability insurance drafts once a year in November. It’s not cheap, so I’ve got to plan ahead for that knowing I’ll have a big expense that month. If you’ve got any of these expenses, write them down! Additionally, if you know this year you’ll need to buy a new laptop or camera, factor that in. Planning ahead is key to tackling turbulence when it arises in your business.
•Pull it all together – this is your cost of doing business. This means how much does it cost you to run your business – literally everything……overwhelmed?
Breathe. You’ve got this. You can do it. I promise! Go make a cup of coffee, have a snack. Take a walk and come back. We’re about to dive in for another round!
DETERMINE HOW MUCH YOU NEED TO MAKE IN ORDER TO LIVE OFF OF
This would be considered your “salary” and it is different from your business revenue. My advice is to come up with a reasonable number in the beginning, something similar to what you currently live off of. I understand you may have a goal of making a different amount – and that’s great. I encourage you to have big dreams and goals just like I do! The intention of this exercise is about setting up a framework for you to go off of in the beginning.
My suggestion here is to do exactly what you did for your business expenses, with your personal finances. *yikes* – did I just say that? Yup. Go make more coffee. 😂
I want you to comb through your personal finances. Starbucks, Target, all of it sister. Figure out the fixed expenses, and the variable ones too. Mortgage, rent, car payments, debts, groceries, gas. Everything.
To figure out what you truly need to pay yourself, you need to figure out how much money you spend. It’s also a nice reality check of if you’re on the right path, or if you need to adjust spending habits.
•Combine the first [business expenses] and second [personal] numbers together.
This is what your business would theoretically need to GROSS in order to sustain itself and you. You want to think of your business and you as two separate things. If your business doesn’t make enough money to cover its own expenses, then it will not make enough money to subsequently pay you after it is done paying for itself. Thus, your business will fall into the red, and that’s not where you want to be.
If you’re not liking the number you need to bring in, or unhappy with what you’re spending, it’s time to assess your disposable expenses. This is where you weigh what is necessary and what isn’t. It is how you determine where money can be saved.
Most businesses base budgeting around quarters, as this is the way federal income taxes are due. It’s a good way to break your year down into four parts.
Projecting is a way to foreshadow how much you plan to spend, as well as how much you plan to bring in. As a brand new business this can be tricky if you don’t have a previous fiscal year to compare to, but once you have a solid handle on expenses it’ll be an easier task.
Projecting allows you to anticipate ebbs and flows in your business and how you’ll need to prepare for things like a slow season. Why is this important? Take for instance the wedding photography industry. During “slow season”, the income is not the same but the expenses are the same. This has to be budgeted for and you can create a plan of how you’ll survive it by knowing your costs ahead of time. You want to make sure you have enough in the bank to cover operating costs and your salary heading into months with decreased revenue.
My goal is to give you a framework to go off of for developing and creating your budget. Once you’ve got a grip on costs then you can say, alight I can afford to spend X amount on advertising, or X amount on education this quarter or this year. Make these decisions, and stick to them but re-visit and re-evaluate your budget continuously.
•Once you are able, hire a CPA. A CPA is trained to help businesses manage their finances. For example, my CPA helps us determine how much money we need to set aside quarterly so we have enough for the income taxes we will owe at the end of the year. Additionally, she also helps us calculate itemized deductions for our business so we are not losing money.