Budgeting Basics
Your cash flow is one of the most important features of your business finances. You need to know that you can cover all of your expenses and continue to make a profit. Hoping that you have enough income to cover the bills will result in stress and anxiety. Creating a budget is essential for financial health. A budget will allow you to know how much income you need and can help you better plan all the other aspects of your business. Here are the basics.
Income
First, identify all your sources of income. Are you selling a physical good or do you provide a service? Is your business steady throughout the year or do you experience seasonality? Do you have any other funding sources that need to be considered? Consider all of these and calculate your monthly average income. Start with an annual amount and then break it down by month, especially if your income fluctuates over the year.
Expenses
Next, list all of your fixed and variable expenses. These expenses include everything from rent, utilities, and insurance to products, materials, and wages. As you do, don’t forget to include things that are paid for infrequently, such as your website fees or business filings. You want to know the averages of all your spending. As before, start with the annual amount and then break it down, so you can see when spending may be higher and when it may be lower.
Balance
Following that, you need to compare your anticipated income to your anticipated outflow. Do you expect to bring in enough income over the year to cover your expenses? If your income matches your expenses, congratulations. You have a balanced budget. However, just like our personal budgets, most people’s expenses will exceed income projected and you will have to make decisions.
Goals
In fact, your next step is to make decisions. It’s time to set some goals. Do you feel like you have reached the income level you want? Maybe you need to set a sales goal to increase income. Do you have expenses that need to be tamed? Perhaps it’s time to set a goal to eliminate unnecessary spending. If you found your income exceeds your expenses already, decide what to do with the extra. For instance, you may want to invest it back into the business to pay for new equipment or upgrades. You may decide to invest in a retirement account for yourself. Or you could take an owner’s draw and turn that surplus into your own income.
Review
Lastly, you need to regularly review and adjust your budget. Each month you should be comparing expected income and expenses to actual income and expenses. This will require tracking your income and expenses, which many bookkeeping software programs can do for you. Doing so, you can quickly identify trends so you can improve your finances.
I’d love to help you review and balance your budget to get you back on track. For a free consultation, click below.