Budget Guide for Starting Your Business
For all stages of business growth, it’s important to track income and expenses and maintain a budget to accurately track the amount of cash on hand. But we often hear from new business owners that they don’t know how to set up a budget or create projections for their business. In this guide, we will explain some common budgeting terms, highlight a few tips for planning budget and income projections, and explain some tools that can help you achieve your goals.
Track All Income Sources – Most businesses have multiple streams of income. For example, your income may include, online sales, monthly contracts, and one-time projects. Or you may sell products through wholesale and retail channels. As an owner, it’s important to understand which products and services are making money.
Organizing services/sectors of a business in terms of revenue will help you understand the big revenue picture and dig into trends by product or service type, and year-over-year performance. For example, a landscaping service might have current year revenue growth, but flat or decreasing revenue in their most profitable service.
By looking at income details, you’ll also see the areas of the business that are experiencing growth so you can ramp up in that area. Once you have a good current year picture, estimate income based on projected growth for future years. Next let’s consider fixed costs.
Plan Fixed Costs – Not all expenses will fit into the same category. Fixed costs are expenses that do not change with an increase or decrease in the amount of goods/services produced or sold. Some examples of fixed costs may include: rent, mortgage, utilities, insurance, internet, work/cell phones, and accounting services. Reviewing past bank statements is a good way to create an initial list of fixed costs.
Consider whether fixed costs increase at some point due to product/service growth. For example, will you need to hire another person? And, don’t forget to create a fixed cost category to build an emergency fund. Once you have estimated fixed costs, the next step is to predict your variable costs.
Predict Variable costs– Variable costs are expenses that increase or decrease depending on the amount or goods or services sold. Some examples of variable expenses include, raw materials, direct labor costs, marketing costs, and transportation. Reviewing the costs needed for your business to sell a product or service, is a good way to start estimating variable costs for your budget.
Use your variable cost information to project expenses for the future based on your income growth projections. Consider whether some unit costs, e.g., raw materials, may decrease with greater volume due to purchase discounts.
Consider One-Time Purchases – Every business will have to allocate funds for purchases that aren’t fixed or variable. These are considered one-time purchases and planning these expenses can make or break a business. One-time purchases include items such as computers, software, and equipment. Businesses can plan these expenses by tracking equipment and other major purchases and predicting the timeframe for upgrades and new items the business will need as it expands. Constantly evaluating this category of expenses will help you build a budget that minimizes surprise expenses.
Building income and expense projections enables you to better track and manage your finances. There are also a variety of tools and apps that can help business owners create projections and track their budget for free.
Budgeting Tools
–Score’s Projection Spreadsheet will help you forecast income and expenses in an excel spreadsheet.
–Personal Capital is an app that provides a view of your financial accounts while also making suggestions for users. These suggestions include nudging investors into saving for long-term subsidiaries such as 401ks and college saving plans.
–Mint is another app that can be useful for business owners. Mint focuses on monthly budgets, evaluates spending and evaluates credit card debt. These features allow owners to stick to their budgets and allows owners to constantly evaluate spending habits.
— Credit Karma offers access to credit reports and also offers an explanation about your credit score and gives examples of how your credit score can affect loans, credit cards and other services.
These are just a few free tools that owners can use to improve their results and stay on top of their budgets. Wherever you are in your income and expense planning, we are here to help. Contact us for a free consultation.