Whether you’re just starting your business or have run a thriving operation for years, without a business budget you’re almost guaranteed to lose money somewhere. Budgeting is an essential part of running a business, and without a properly balanced budget you may be overpaying on expenses or underutilizing the funds at your disposal.
What Is a Business Budget?
A business budget is not as scary as it sounds — it’s simply a tool for helping you keep track of where your money is coming from and going to! It is a specific, organized plan that helps you understand where your money is coming from, where it’s going, and what (if any) is left over.
Budgeting involves looking at your revenue and expenses and determining where each and every penny will go on a monthly, quarterly, and annual basis. Even the smallest of businesses with just a single business owner needs a budget to keep track of their bread and butter.
Why You Need a Budget for Your Business
Budgeting does take a lot of work, and you may feel you don’t have the time or resources for it, but maintaining a budget for your business can actually save you both time and money! A business budget:
- Ensures you always know exactly how much money you have and where it needs to go.
- Provides easy and organized proof of income for the self-employed business owner.
- Helps you avoid the complication of over or underpaying your taxes.
- Prepares you for unexpected expenses before they come up.
- Assists you in making informed financial decisions.
- Gives you a foundation from which to set your financial goals.
Convinced a business budget is in your future? Then let’s start building it!
How to Create a Business Budget in 5 Easy Steps
To help you stop feeling like you’re pouring money down the drain each month, here’s a simple step-by-step guide for creating your own basic business budget.
1. Create a Spreadsheet for Income and Expenses
Before you dive into collecting your revenue and expense details, you need a method of organizing all this financial information. You can either create your own template for this in Google Sheets or Excel or — better yet — find a free template online.
Free templates for tracking small business expenses are a dime a dozen! Here are a few places to look:
- Google Sheets has several monthly and annual business budget templates. Just login and search the template library for one that suits your needs.
- Microsoft Office has several free and premium budget templates available.
- Capterra’s small business budget template is a favorite among small business owners, and very user-friendly.
If this is your first business budget, go with a simpler template in Google Sheets or Microsoft Excel — whichever you’re most familiar with. The goal is to add organization to your finances, not increase stress and leave you feeling overwhelmed! You can always upgrade to a more complex spreadsheet or budgeting system later on, but starting simple will set you up best for more immediate success.
2. Outline Your Expenses
When first starting out with your business, you should have a clear understanding of the costs involved in running it. This should include everything from rent and utilities to supplies and digital tools. Be sure to include setting a percentage aside for estimated quarterly taxes (usually around 20%) and any recurring fees involved in running your business.
If you run your business from home and don’t have a brick and mortar location, keep in mind that you can write off a portion of your rent or mortgage payments as a business expense. If you have a dedicated room for your home office — not a shared space like a corner of your bedroom — you can write off that square footage as a business expense to help you save on taxes. To make tracking this even easier, you can split the transaction within the Lili app. This works for your internet bill too!
3. Estimate Your Revenue
Once you know your expenses, it’s time to take a look at your revenue (the actual money you’re making). If you’re already in business and have been established for a while, you should already have a strong estimate of your monthly and annual revenue. Use that as a starting point and make note of any projected growth over the coming months. If you’re creating this budget in order to start a new business venture, your expenses should set the precedent for how much revenue you need to actually make money.
Don’t think about your revenue in just a monthly sense. Especially if you sell products or services that are more seasonal in nature, your revenue will fluctuate depending on the time of year. Looking at your budget in terms of quarterly and annual revenue will give you a better picture of how it should break down month-to-month. This will also help you establish a more accurate margin.
4. Determine Your Margin
Now that you have your estimated revenue and expenses, it’s time to do a little math. Most business budget templates should already have formulas in place to calculate this for you, so don’t worry if you’re no mathematician. It all comes down to simple subtraction anyway!
Take your total expenses and subtract it from your estimated revenue. What money remains is your business’s profit, or “margin,” if looked at as a percentage of your total revenue.
For business owners who want to grow further, use your margin to find out how much room you have to invest in your business’s future. You should consider both your current margin and projected margin (how much you expect revenue and expenses to increase over time) while setting these goals.
If you have specific income or growth goals for your business, creating a budget plan based on your current margin and projections will help you meet those goals.
5. Create a Budget Plan
Use a budget plan to set aside the necessary amount of money each month to cover upcoming expenses and build up savings. Keep in mind how much you need to set aside for taxes as well as both monthly and annually recurring bills, and create an emergency fund to cover any unexpected costs.
Your budget plan should account for separating your personal and work expenses and help you determine which upcoming transactions to expect. If you’re a solopreneur or freelancer who is content where they’re at, you can pretty much settle here. But why do that when your business has so much potential?
A budget plan isn’t just for the sake of financial maintenance — it’s also a tool you can use to help your business grow! Take a look at your current margin. How much of that do you need for your paycheck each month? If there’s money left over after withdrawing your income, then invest it back into your business. Create a plan for how you’ll use or save that money, then determine how you project your revenue to increase both naturally and as a result of that investment.
This is an ongoing process, so always review your goals at the end of the month or quarter to see if you’ve met them or if you should revisit your budget. If you’ve blown your goals out of the water, then it’s time to set some new ones. Keep your budget and goals evolving, and your business will evolve with them.
Example of a Good Business Budget
If you’re a visual learner, here’s a simple small business budget breakdown to help you visualize what yours might look like:
|Project #1 Income||$4000|
|Project #2 Income||$2500|
|Project #3 Income||$3000|
|Email marketing software||$25|
Total Income ($11,500) – Total Expenses ($4,520) = Net Income ($6,980)
- Every business needs a budget. Full stop.
- Having a business budget can save you time and money.
- A business budget doesn’t need to be complicated. Use a free online template!
- Your business budget should compile your expenses and revenue.
- A margin (revenue minus expenses) will help you determine your income and growth potential
- Use your margin and projections to create a budget plan that will help you achieve your business goals
That’s not so daunting, is it? A business budget doesn’t have to be so complicated that it requires a team of accountants. You can manage your expenses yourself with the right budget plan and financial tools at your disposal. Now that you understand business budget creation from A to Z, find out how Lili can help you easily manage your business finances and deliver a balanced budget!