Growing up, my parents were strong proponents of budgeting and living within our means.
Even as a kid, it was easy to understand basic things like not wanting to overextend yourself! Things like saving for a rainy day, spending responsibly, and giving were drilled into me at a young age.
For that, I'm thankful!
When I was completing my MBA, I was lucky enough to sit through many class discussions on budgeting for large corporations. I was surprised to learn that many of those same principles that I had learned from my parents applied even in multi-million dollar businesses.
Being careful to not overextend, spending responsibly, and taking care of employees are huge components of building large, corporate budgets.
Unsurprisingly, these principles apply to small businesses as well.
What I've learned (both from those incredible MBA discussions and from my wonderful parents!) is that a budget is simply a way to care of yourself, your business, and anyone that is reliant on you.
By being a good steward of your small business' financial life, your business will prosper.
What goes into a budget?
Budgets are incredibly important for any small business. They help you keep track of what you should be spending compared to how much you earn!
If you need a little more convincing, check out 5 Reasons Your Business Needs a Budget.
First, let’s look at what goes into a budget:
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: Put simply, income (also known as revenue) is 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!
Sounds simple enough, right?
If you’re a freelancer that only does a few jobs per year, creating a budget can give you insight into how much you’re earning and spending in a year. For bigger businesses, budgets are incredibly important in tracking every dollar that is spent and earned.
Even a basic budget can be incredibly helpful for guiding your business, especially during hard times!
How do I make my budget?
Making a budget is super simple. The key to a good budget is simply creating categories for all of your expenses and estimating your total income!
1. Decide how detailed your budget needs to be.
Depending on the size of your business, you may not need a huge, comprehensive document that lists every place your money might go during a year.
Again, if you’re a freelance designer only taking on a few jobs per year, it’s okay to only have two columns in your budget: one for expenses, and one for your income!
On the other hand, if this is your 5th year in business as a wedding photographer, you may want to include a bit more detail in your budget to really get a sense of where your money is going.
We’ll be working on creating a monthly budget so that you can easily track what your business is spending and earning on a monthly basis.
2. Decide where your budget will live.
For your budget to be useful, it has to be something you’re comfortable looking at.
Financial documents can take so many different forms. Excel spreadsheets, Word documents, nifty iPhone apps, messy notes scribbled on napkins… There are tons of ways to track your money!
If you’re an Excel or Google Sheets whiz, you should have no trouble whipping up a beautiful spreadsheet to use. Give our Better Business Budget template a shot for an easy start on building your budget.
If you prefer writing everything out, take a chance on creating that budget in Word or Google Docs!
If you’re in need of a phone app to easily track everything, check out the YouNeedABudget app, or even Dave Ramsey’s EveryDollar! While these apps might be targeted to consumers for personal use, they’re fantastic for creating a business budget too.
Struggling to maintain your budget yourself? The team at Amarlo is here to help. We'll build a budget that fits your needs and goals perfectly! Schedule a call here.
3. Identify and list your Fixed Costs.
Remember that budgets are made up of two parts:
When it comes to expenses, there are two major types: Fixed Costs and Variable Costs. Let’s take a look at Fixed Costs!
A Fixed Cost is something that you can expect to pay for at least a year at the same rate every time. Fixed Costs do not go up or down — they’re just that: fixed! Examples of Fixed Costs are studio or office rent, salaries, software costs, and more.
Remember, Fixed Costs are expenses that don’t change; they are as constant as the sun in California or the rain in Washington!
It’s typically suggested to create a column in your budget for Fixed Costs to easily track what your business must pay every month. Creating and assigning categories based on the type of cost can help you organize your budget in a more efficient way!
For a monthly budget, you can either divide any and all Fixed Costs that are paid on a yearly basis by 12. Alternatively, include that one-time yearly cost as a larger expense that will come up once per year during a certain month.
4. Identify and list your Variable Costs.
In contrast to expenses that are fixed and the same every single month, you’ll also need to budget for costs that change from month to month. These are called Variable Costs!
Variable Costs are expenses that occur at different rates each month and are often related to the cost of creating a product or performing a service.
For example, video production teams often need to purchase materials for their productions, destination wedding photographers may have to cover travel expenses, and freelancers may have to pay for meals or parking when out on a job!
Put simply, these costs can change based on the needs of a job or the needs of your business.
Once you’ve identified your Variable Costs, start listing them in your budget. You can categorize your Variable Costs with simple headings like “Office Supplies”, “Marketing”, “Meals and Entertainment”, and more.
Totaling up those categories will help you identify what your business is spending on most!
5. Calculate your monthly income.
Up until now, we’ve only looked at expenses together! Remember, a budget is made up of two parts:
It’s just as important to list your income as it is to list your expenses. By doing so, you’ll be able to easily see if your business is consistently making enough money to cover those expenses!
Most small businesses only have one source of income: either a product that is sold to consumers or a service that is performed for others.
For creative service-based businesses like photographers, designers, and more, identifying how much money is coming in every month can be relatively simple.
Start by estimating the total number of jobs you expect to have in a year. If you don’t know how much you’ll be charging each client exactly, you can estimate or calculate an average based on what you typically charge. Then, multiply the average by the total number of clients you expect to work with.
Since you’re creating a monthly budget, you’ll want to divide that total number by 12 to see your income spread out across the year. If you expect to have slower months, simply adjust your income accordingly!
Keep Track of Your Spending
Now that you've compiled your Fixed Costs, Variable Costs, and Income, your budget is ready!
At a glance, your budget can easily tell you if your business is profitable (making more money than is being spent). It's important to use this document as a reference for all of your business' spending. Keeping diligent care of where your money goes is all part of running a business the better way!
Budgeting can be a big step in gaining control of your business’ financial health.
That’s why the team at Amarlo is prepared to do it for you! If you’re ready to finally find some help in creating that perfect budget for your creative small business, get started with us below!