It's clear that financial education has been a struggle in America for quite a long time.
With that in mind, it's not a shock that 61% of small business owners didn't have a budget in 2018. I would imagine that number is even lower for most creative business owners like photographers, designers, and more. We often expect people who run their own businesses to have a sharp handle on their financial lives, but that's not always the case.
Instead, business owners tend to struggle just as much as the rest of the population when it comes to finances. That's why 1 in 5 business don't survive their first 5 years in business.
It is possible for us to live in a world in which business owners (and the general public) don't struggle with managing their finances. We can have healthy businesses, vibrant financial lives, and feel in control.
We get closer to that world every time someone creates a budget!
What is a business budget?
Put simply, a budget is a document that is created to help business owners know exactly what they’re spending and earning.
A budget is an incredibly useful tool when it comes to planning out your creative small business. For many photographers, designers, and other freelancers, having a budget can help determine pricing, how much to pay yourself, and how much you need to pay in taxes.
A budget has two parts:
- Expenses: These are what your business spends each year. An expense is just a transaction where money is leaving your business! Typical expenses for creative freelancers might include a new camera, editing software, and even parking fees. Expenses can be controlled and even reduced!
- Income or revenue: Money flowing into your business. This is what you earn when someone purchases what your business is selling. Your income is determined by whatever your customers purchase, so it’s often a lot harder to control than your expenses!
Budgeting is incredibly important for the life of your small business.
We recommend getting started with a zero-sum budget — a document that tracks all of your spending and income down to the last penny — to account for all of your expenses and income.
Below, we’ll review how budgets help business owners know if they’re actually turning a profit (making more money than is being spent), get rid of unnecessary expenses, and plan for the future. We’ll also take a look at how budgeting allows you to make better decisions for your business, enable you to pay yourself more, and even find some certainty during tax time.
1. Discover if your business is profitable.
If you’re stuck wondering how much money you actually made last year and are trying to figure out what next year will look like, it’s probably time to create a budget.
Totaling up all of your expenses and income into one document enables you as a small business owner to easily calculate the total amount of money that was made by your business and the total amount spent.
Your business is profitable if the total amount made is greater than the total amount spent!
By discovering your business’s profitability, you can determine if you need to charge customers more for your services. You can also increase your profitability by reducing some of your expenses!
2. Curb unnecessary spending.
Unsurprisingly, it’s incredibly easy these days to set your bills on auto-pay and forget about them. While auto-pay systems are incredibly useful, they can often lead to unexpected long-term expenses.
By listing out all the expenses that your business has, you’ll be able to discover what expenses are necessary to the life and flourishing of your business.
Categorizing expenses can be really easy, too! Within your budget, you’ll want to mark down which expenses are fixed (the same from month to month) and which are variable (changing from month to month).
By discovering where your money is going once it comes in, you’ll be able to run a more efficient and educated business — and you should be paid like it, too!
3. Pay yourself what you’re worth.
What most entrepreneurs forget to ask themselves is, “Am I paying myself enough from my business?” For many freelancers — photographers, designers, and other creatives — there is often a lot of uncertainty around this question.
Let’s be clear: the money that you earn within your small business is yours (unless you’ve incorporated or in a legal partnership), which means that you choose what to do with it.
It is important to keep money earned from your business within your business in order to grow and cover your expenses, but it’s also important to actually pay yourself a reasonable wage!
According to MIT, the average living wage in America was $16.07 per hour in 2017. That’s about $33,425 per year or $2,785 per month.
Establishing a set salary plan for yourself within your business’ budget is incredibly useful as it can help you determine exactly where those resources are going. Regularly drawing the same amount from your business on a bi-weekly or even monthly basis can help bring some incredibly useful boundaries into your budget. This practice can also help with your personal budgeting, as well as during tax time!
4. Be better prepared during tax time.
Let’s be real: tax time is often difficult, stressful, and sometimes emotional as a small business owner. How do you easily calculate what your business owes?
Creating a budget can help ease the strain of tax time by helping you anticipate the number of business expenses you’ll be able to write off. Writing off these business expenses can help you lower the amount of taxable income due as a result of your business.
A budget also allows you as a small business owner to easily estimate the amount of quarterly taxes that you’ll need to pay to the IRS. By anticipating what your business will be bringing in over the course of a year, you can begin to calculate how much you’ll be responsible for paying!
A comprehensive budget can bring in a lot of clarity. In times of uncertainty, it helps to have a guiding document that can be relied on!
5. Plan for growth.
Like plants, businesses grow with time and proper care and attention. Sometimes business growth can feel instantaneous and volatile, while other times it can feel slow and unremarkable.
The bottom line is, your business’ budget is the beginning of your plan for growth.
As your business grows, so do your expenses. You may choose to hire another person to help with the bookkeeping, or to help out around the office.
To plan for growth, consider all of the jobs that you do to keep your business growing. Social media, bookkeeping, designing, planning, SEO…
Which of these jobs are $15 per hour jobs that you might want to hire out for in the future? Which of these are $50 per hour jobs that only you can do?
By planning out those expenses and building in an expectation of growth into your budget, your business can flourish.
Ready to start building your budget?
Get started by reading the next article: How to Build a Better Business Budget!
Still feeling overwhelmed, but not quite ready to hire someone full time? Good news, our team of Better Business Managers can help for a fraction of the cost.