Are you thinking of turning your side hustle into a small business? If so, the number one thing you need to consider is creating a business budget.
If you want to keep your business afloat, follow these steps to help you manage the money you are making and spending.
What is a business budget?
A business budget is a way to keep track of all your business expenses, revenues, and profits. Having a budget will help you know how much your business is making and what adjustments you need to make to keep your business running smoothly.
There are many different formats a business budget can take. One common form is an Excel sheet. For more advanced forms, you can use different platforms and apps. Some popular apps include Freshbooks, Pocketguard, and Xero.
Why do you need a business budget?
If you’re a small business owner, you might think it’s easier to organize and manage your business income with your regular income and expenses. After all, your personal life and your business life might blend into each other.
However, keeping your business finances separate from a budget can help avoid confusion. Here are some other reasons to have a business budget.
Having a business budget will help you keep track of your expenses so that you don’t run the risk of going out of business.
Having a business budget will be helpful when it comes to your business taxes.
It’s a great way to know how much money is coming in and going out of your business.
It’s a simple way to separate your finances from your business expenses.
Six steps to creating a business budget
Creating a business budget can be simple. It involves calculating numbers and taking a deeper look at your business. However, once you take some time to set up your budget, you’ll find that your business runs smoother than before.
1. Know where your money is coming from
It’s exciting when your business starts making money, but do you know how much it makes monthly and yearly? If not, now is the time to figure out the answer to that question.
Find a moment to sit down and note all your revenue streams. These are all the different ways money comes in.
Start from the beginning of the year or the beginning of last year, depending on when you’re making your budget. Look at how you’ve made money each month and the amount.
For example, if you’re a photographer, your list may look like:
- Weddings: $300
- Engagement shoots: $200
- Portrait shoots: $150
Calculate your monthly revenue total once you’ve written down your monthly income streams. Your revenue total is the amount of money coming in regardless of expenses. Start to notice which months are high and which months are lower.
The idea is to understand where your money comes from each month, how much you make, and which income streams and months offer the highest revenue. This information will give you more of an understanding of how to plan for the year ahead.
2. Factor in costs to run your business
Here is the part where you’ll need to be very thorough and look at everything it costs you to run your business.
A list of essential expenses for a small business includes:
- Payroll ( make sure to include yourself if you’re a solo entrepreneur)
- Rent for office space (for a remote business, this could consist of co-working space or a fraction of your housing costs)
- Utilities for your office space
- Software subscriptions
- Advertising and marketing
- Taxes
- Business Insurance
- Banks and other fees
- Office supplies and technology
- Raw materials
- Packaging and shipping
3. Calculate potential profits or loss
Here comes the part that might feel uncomfortable but is very important. With your expenses and revenue all calculated, you will figure out your profit or loss.
To do so, choose a time you want to look at, for example, the last three months, six months, or year. For whatever period you choose, write down the number for your total expenses, then subtract that from your total revenue. Whatever number is left over is your profit.
But what does it mean if you don’t have a profit or your number is negative? If your business isn’t making a profit, you can use your business budget to even out the cost. Follow the next step to see how.
4. See where you can make adjustments to your budget
Starting and growing a business takes time, effort, and patience. If you’re unhappy with your profit numbers, then it’s time to adjust our business budget.
Take a look at your expenses and where you can cut costs. Perhaps you’ve been paying for a service you don’t regularly use. Maybe you can downgrade your office space into a more affordable place.
Some common areas to cut business costs include:
- Going paperless
- Avoid travel when possible
- Hire freelancers
- Lease equipment instead of buying it
- Limit marketing expenses
- Negotiate prices with the current supplier or find a new supplier
Another way you can adjust your budget is to check your revenue. Make sure you calculate all your income. Are there any outstanding invoices you have? Could you offer an additional service or product to help? Can you increase your prices without comprising your services or damaging the relationship with your clients?’
5. Set up an emergency fund for your business
Once you get to a point where you’re making a reasonable profit, you want to start setting up an emergency fund that you can work into your business budget. Essentially, you’ll have a goal to save a certain amount of money, for instance, three months’ worth of necessary expenses such as payroll, rent, insurance, etc. You’ll put money aside to save up for this goal each month.
While this step may not seem necessary, it can save your business in the long run and help prevent it from going out of business. As your budget will show you, you’ve brought in more revenue than others in some months. Having an emergency fund can help your business get through the rough months.
Also, if anything were to happen and you become unable to work, or perhaps you want to take some time off for your mental health and well-being, an emergency fund will allow you the time to do so.
6. Stick to your budget
The last and most crucial step is to stick to your budget. Once you’ve made adjustments and know the general costs of running your business, don’t buy things you don’t need to spend without thinking.
Of course, it’s important to treat yourself and celebrate the success of your business, but if you’re not mindful, your earnings can leave as quickly as they came.
