For first time small business owners, setting up the ongoing business budget should be the spine of your strategic business plan. But starting from scratch without recourse to funding can seem daunting, if not impossible.
So how should you go about determining how much you can-and should spend? And where should you focus the bulk of your spending?
Establishing a strong business budget can help you track where your company’s weaknesses and strengths are, and can allow you to chart your progress as your business grows.
Let’s take a look at five tips to help you set up your small business budget and stick with it.
1. Do the Research
One of the first steps in figuring out an ideal small business budget is to do some industry research. Try to determine an industry standard for your new business by browsing the internet. You can use the IRS website to start to shape an idea of which percentages of revenue will be assigned to cover which costs.
Speak to local business owners and use local resources, like the library or a nearby university, to gather information. While the needs of every small business will vary greatly, gaining an understanding of the averages across businesses similar to yours will help you form a clearer picture of how you should approach your budget.
2. Map Out the Basics
Every business requires some initial startup capital, not only to grow, but to begin at all. In establishing your small business budget, now is the time to take an honest look at what resources you have and what resources you need. Where do you absolutely need to spend to allow your business to exist? And how can you direct your spending more fruitfully to help your business grow?
First, map out the basics. If your business involves a retail or office space, you will need to include rent, utilities, and Wi-Fi. If your business exists online- or if you need a website or social media presence to help your business grow- mark down how much you are spending annually on website hosting and maintenance, social media advertising, and membership in any professional organizations. Think about the tools you have and the tools you will need to use to promote your business going forward. If you are promoting your business digitally, make a note of how much you pay for Photoshop, Canva, or other design tools. If you are taking out ads in the newspaper or on the radio, write that down too.
Before you begin to make your plan, it will be helpful to have all the information written down. Then you can go through your notes page with a fine-toothed comb and select which basics fall under which categories. Things like rent and website hosting may fall under “Essentials”- mark these fixed costs with a particular color or star. Things like Photoshop and newspaper ads may fall under “Promotions”- mark these as well. Creating a visual map of the basics will allow you to quickly gain a sense of what kind of details you are working with, without needing to organize them into an official budget…yet.
3. Consolidate Costs
Once you have figured out a clear sense of your most basic needs, you will have a stronger starting point for establishing your budget based on the reality of how much you will have to earn in order to come out even. But before you get to the revenue side of the equation, you should take a moment to realistically assess your priorities and baseline cost needs.
Particularly as a brand-new small business, you may want to consider putting in a little extra time and research to find places where you could save before you even start earning. Are you paying more than you need to for your internet service? Consider switching providers to cut costs. What about rent on your office space? Do you really need as much space as you think when you start out?
While you don’t want to undermine real needs your business will have, you may find that with a bit of extra consideration, there are places you can save from the get go. And that extra pocket of money in the basic budget can go towards things like advertising, hiring, and product development.
4. Add Up Your Incomes
Now you are ready to proceed with building your budget, so the next essential step will be to include all of your sources of income. Your sales figures are the most straightforward view of your income, and for some small businesses that may be the entire income source.
Other businesses, such as a freelance video editing business, may encompass various strains of income, with varying numbers. For example, a freelance video editor may cite income from a professional advertising campaign for a major global brand, a personal book promotion video for an individual client, and a sponsored YouTube series where you teach people how to edit videos.
Tally up all of these sources and add them to your income column.
5. Keep it Organized
Now return to your previous notes. Create a column for fixed expenses drawn from the basic “Essentials” you identified before. Create another column for variable expenses and tally up the total of this. Include one more column for likely one-off major expenses, such as buying new equipment for your business, or enrolling in a training course. Then, yet another column that includes your various sources of income.
Now that all of your information is in place, you can add up the totals and start to compare the amount that is coming in to the amount that is going out. Add up your total expenses and your total income. Review those numbers and you can quickly determine where and how you may need to make adjustments for your business.
If your outgoing costs exceed your total income, you will know that you need to focus on bringing in more business or investigating further sources of revenue. If your income is much higher than your total expenses, then you can critically determine how best to invest some of those profits back into the business to foster further growth.
Stick With It
While it may seem intimidating at times, your weekly, monthly, and annual budgets can be dynamic tools to assist you in charting the course of your small business. Get into the habit of updating the budget at the end of the day every workday. If there’s nothing new to add, check in with your budget and make sure you are staying on track.
Establishing this habit early on will help you remain focused and guided within the realistic capabilities of your business. And keeping your budget updated will allow you to witness clearly what is happening with your resources as you expand and grow.