We know that small business budgeting can be a hassle when running your own company, especially if you aren’t from an accounting background. Managing cash flow, forecasting your expenses and running an operation with little wiggle room means you have to run a tight ship.
And just when you think you have it all worked out, there’s the inevitable curveball like an employee quitting or a disgruntled customer. It can seem overwhelming even at the best of times.
However, it doesn’t have to be so stressful. When you know how to make a sensible small business budget and which tools and resources can support it, it can ease even the most scrupulous founders. We spoke with some industry experts about how to budget your small business in a way that makes it a breeze, and here’s what they came up with.
Why Budgeting Is So Important
Budgeting is all about keeping your business afloat. An insightful budget can demonstrate to you the financial state of your business and give you an idea of what you can spend your money on without going beyond your business’s means. Without a budget, you may not even know whether you are turning a profit or unsustainably spending too much.
According to a small business budgeting survey, only 50 percent of small businesses created an official budget in 2020.
However, there are a variety of benefits to small business budgeting, which Martin Luenendonk from FounderJar outlines:
It helps you understand the financial health of your business.
A well-organized budget can quickly show you the expenses and profits across your business to help you manage them effectively.
A budget allows you to develop a strategic plan about your business's future and the possibility for expansion.
It can assist you in making financial decisions, such as whether you can manage a business loan or make any big investments.
A budget is also an essential part of attracting potential investors as it demonstrates your financial plan.
Despite knowing these benefits, it can still be difficult to budget for your small business. Budgeting requires a balancing act that takes a number of factors into consideration. Follow these steps for a smooth process.
How to Make Small Business Budgeting Easier
Work Out Your Expenses
Before you sit down to think about your budget, it’s a good idea to track your expenses. “This will help you understand where your money is going each month,” says Kevin Miller, an entrepreneur and co-founder of GR0. Only once you have an idea of your spending and expenses can you start to make adjustments and set a financial plan.
The best way to do this is to make a detailed list of all the expenses your business generates. “This could include rent, utilities, wages, insurances, taxes and inventories you must maintain,” Luenendonk explains. Then, you should also think about your own personal expenses so that you have an idea of what “your business must provide to sustain you and your family as well,” suggests Luenendonk.
By doing this, you will have a clearer picture of what your business needs to generate at a minimum and then build on that foundation.
Cautiously Estimate Revenue
The other important part of the budgeting process is estimating your business’ revenue to see how much money you expect to receive in order to cover your expenses. This is where things get tricky.
According to a study done by CBInsights, running out of cash is the number one reason that startups and small businesses fail. Try to be as realistic and cautious as possible when estimating your business’ projected income.
It’s important to be realistic about any future projections. The best way to keep it as accurate as possible is to use previous revenue reports. “I usually start with the prior year’s financial statements as a starting point, then build the budget based on assumptions about revenue,” says James Heyward from Heyward CPA, an accounting and tax firm specializing in small businesses.
However, you need to be careful when making predictions. “If you overestimate your revenue, you’ll end up needing more cash to meet your operational needs,” explains Amira Irfan, founder of A Self Guru.
Instead of overestimating, try to stick to what’s realistic or even underestimate if you can — one study showed that 19 percent of businesses spend less than what was budgeted. That way, if you have some leftover, you’ll be pleasantly surprised and can reinvest that surplus back into your business.
While dealing with all these numbers might seem intimidating, there are ways of managing all this data more easily. Spreadsheets can be a simple and easy way for small businesses to track finances and keep basic records, but it’s not necessarily the best tool for running reports quickly. Instead, there are small business budgeting software programs that can be just right for you.
Anna Barker, the founder of LogicalDollar, says that “While many small business owners try to cut costs wherever they can, spending a bit of money on accounting software can go a long way here. Certain applications can automatically track your income and expenses, with those same figures then able to be extracted for future years.” This can end up saving you lots of time and reduce the risk of mistakes or errors. “Both of which are more than worth the cost of this software," Barker says.
“The utilization of online accounting software like Xero and QuickBooks online has budgeting tools built in that simplify the process,” says Heyward. This can be the easiest way to maintain financial records and gain access to information like your expenses and revenue without taking up too much of your time.
Revisit and Update Your Budget Regularly
You also shouldn’t look at your budget as being a fixed framework or plan because your business changes over time. Miller suggests that when creating your small business budget, you should keep it as flexible as possible. “Things can always change and it’s important to be able to adapt as needed,” he says.
For this reason, you should try to update your budget to adjust to any changes that may have happened. “Budgets should be revisited regularly to make sure that they still reflect the business’s current goals and needs,” Miller says. As your expenses and revenues change with time, so should your budget and financial plan.
Factor in Industry Trends and Unpredictable Shocks
If the past couple of years have proved anything for small businesses, it’s that unpredictable shocks or new industry trends can happen at any time. While this can be hard to plan for, it’s always ideal to at least consider that your budget might need to change due to circumstances out of your control.
“You can’t possibly expect to reach all your business goals every month — due to seasonal inconsistency and trends within industries,” Irfan warns. This means that your budget should be flexible to changes and allow for potential slow periods when you might not always hit your revenue targets or projections. “Budgeting with this in mind can be very beneficial,” says Irfan.
Stick to Your Budget Plan
We know this is all a lot to keep in mind, so Miller provides a few important tips to stay on track and make budgeting easier:
Make a budget and stick to it. Be realistic about what you can afford and make sure to stick to it.
Take advantage of free or discounted services. There are a lot of services out there that offer discounts to small business owners.
Be mindful of how you're spending your money. Invest in things that will help your business grow and cut back on unnecessary expenses.
Find alternate ways to make money. If you’re struggling to make ends meet, it may be time to start looking for alternate sources of income.
Get creative. There are a lot of ways to save money and make more money, so brainstorm some ideas and see what you come up with.
Dealing with the reality of expenses and trying to stay within your business’s means can be a difficult balancing act. However, there are ways to make small business budgeting a lot more enjoyable and a lot less stressful. Utilizing accounting software, being realistic about revenue goals, reviewing your finances often and allowing for the occasional slow periods are all ways that you can reach your budgeting goals and keep your business thriving.
For even more budgeting and finance help, check out Incfile's comprehensive Accounting and Bookkeeping service. We can handle all your transactions, reconciliation, tax preparation and filing for you.
Jenna Scatena is a writer and content strategist with a love for stories that have never been told before. More than a decade of working with prominent magazines and brands informs her approach to impactful storytelling. Her stories have reached more than 30 million readers, won multiple awards and been anthologized in books. Jenna's work has appeared in Conde Nast Traveler, Vogue, Marie Claire, The San Francisco, BBC and The Atlantic. She's the founder of the editorial consultancy, Lede Studio.