Budgeting may not be one of the more glamorous aspects of running your business, but it is a crucial element to running a successful business. By having a budget, you have a frame of reference to use as a guide throughout the period of time your budget covers.
Your budget helps you have a solid understanding of how the cash flows of your business might play out. This way you always know what sort of opportunities you can and cannot afford.
The estimates within your budget can establish guardrails that help you quickly avoid expenses that can crush your business. You can also evaluate your actual results by comparing them to the predicted performance for the same time span from your budget.
What is a Business Budget?
When you create your budget, you have two main things you are trying to estimate: revenues (money you receive) and expenses (money you spend). If you are budgeting a profitable business, you should budget for more revenues than expenses. But also keep in mind that not all businesses are profitable in their first year. Some businesses are profitable in a few months, but other startups take years to become profitable.
Time Period for Your Business Budget
One of the first things to decide is the time period for your budget. The three most popular time periods for a business budget are monthly, quarterly, and yearly. The ideal time period for your business budget will depend on the seasonality of your business, the amount of time and energy you want to invest in your budget, and the level of detail you want or need from your budget.
Monthly Business Budgets
Monthly budgets are great for businesses that have revenues and expenses that change drastically from month-to-month. This can be because you are growing (or shrinking) at a very fast rate. Or it can also be due to the cyclical nature of certain industries.
For example, a greeting card business may need to pay special attention to the popular holiday card months of December (Christmas), February (Valentine’s Day), May (Mother’s Day), June (Father’s Day), and March or April (Easter). Another example might be a costume business that relies heavily on sales from Halloween in the month of October.
Quarterly Business Budgets
Many other businesses use quarterly budgets. They are not as much work as monthly budgets, but still do allow tracking of seasonal trends. This means they don’t allow you track your performance as often, but still allows you to capture a degree of seasonality.
This can be great for retail or other businesses who depend on the holiday season. They may have relatively similar finances for the first three quarters of the year. But they also need to monitor and compare the results of their fourth calendar quarters (Q4) more closely.
Annual Business Budgets
If your business isn’t seasonal and you don’t need much granularity, you may consider annual budgeting. This budget period still allows you to evaluate performance, but doesn’t require nearly as much research as quarterly or monthly budgets. Annual budgets are great for business owners with regular sales that are strapped for time and just want a basic level of accountability.
Creating Your Business Budget
If you’ve lucky enough to have been in business for a year or more, you already have some great information to help you build your budget for the current or next year. This information can be found on your income statement or profit and loss statement (P&L). This statement contains all of your revenues and expenses for a given period of time.
If you’ve never seen your P&L before, you may want to check with your bookkeeper, accountant, or tax preparer. You may also be able to get a lot of this information from your business or personal tax return from previous years.
If you are a new business or don’t have any reliable historical records, you’ll have to rely heavily on research and educated estimation. You can find lots of great resources by searching on Google for how much revenue is realistic for a given industry and how much certain expenses could be in your first year.
If in doubt, it’s always best to underestimate your revenues and overestimate your expenses. This way you are prepared for a worst case scenario and don’t run into cash flow problems. If things turn out better than predicted, you’ll have more profit and better data for next year’s budget.
You may want to also consult with an expert in your industry and evaluate local or regional competitors. An expert may suggest hypothetical scenarios you didn’t consider. They can also use their expertise to make sure you fully understand all the potential risks. These scenarios and risks can illuminate the possibility of hidden expenses or revenue shortfalls.
Listen and Learn on the Kickin’ it with Kapok Podcast
In the episode “Gotta Risk it to Get the Biscuit” we discuss how businesses are inherently risky and explain how strategic risk is a must in business. We use our own company as an example, and discuss how we were able to accept and manage risk.
Benefits of Your Budget
Like with setting a goal for your small business, defining a clear budget gives you a way to benchmark your performance. Every month or quarter, you can compare your budgeted spending to your actual spending.
For example at the beginning of the year you may have budgeted $25,000 for marketing. Then come the end of the year you realize you actually spent only $15,000. Is this a problem or something to celebrate?
When you have a big discrepancy like this, it is then important to determine why it happened and adjust for the future, if needed. Did you run out of cash, because you went over budget elsewhere? Or maybe you decided your current marketing efforts we’re not working.
If the problem was limited cash flow, than you need to get those expenses under control, so you can spend the appropriate amount of money on marketing next year. If the problem is with the marketing results, then you need to look for other more effective methods of marketing or determine if the marketing budget for your small business needs adjusting.
Do Small Businesses Really Need a Budget?
If we’re being real, plenty of smaller business get by without a budget. While it is possible to get by without a budget, it can be detrimental in much the same was as it is to not having a plan for a small business. Without a budget, or a plan, that business may succeed in the short term, but without accountability they cannot evaluate their performance and progress. It will be much more difficult for them to ascertain if they are spending too much or too little in certain areas.
It may seem reasonable to be spending a certain number of dollars on something if you’ve never budgeted that type of expense. After a little research, you may learn that you are vastly overspending. Or you may be reassured that you are getting a great deal or spending just the right amount of money.
Finally, don’t be afraid to change your budget if your business circumstances change. Having a business budget does not mean being locked into a certain level of spending in any given category. You should change course as immediately as possible if something is not working, becomes less valuable, or just doesn’t make business sense anymore.
Your business budget should serve your needs as a business owner. It should not be any more or any less. Think about what sort of accountability in revenues and expenses would have a positive impact on your business. Focus on that, and you should have a successful strategy for monitoring and improving your business?
Have questions or comments about small business budgeting? Leave your feedback in the comments below.