The Most Important Things to Consider When Building a Budget for Your Business

March 17, 2023

Money is like oxygen for businesses: you need it to survive, and it's best to have enough to avoid gasping for air when times get tough.

As an entrepreneur, keeping a pulse on your finances is crucial to staying alive and creating a thriving business!

A budget is one of the most fundamental tools for managing your finances, which provides a roadmap for your business's financial health. By identifying your income streams and your fixed and variable expenses, you can clearly understand your financial situation and plan for the future.

Of course, managing your finances isn't always easy.

It can feel like a complicated and overwhelming task, especially for those without a background in accounting. But fear not! In this article, we'll break down the basics of creating and managing a budget for your business. From understanding your income and expenses to reconciling your accounts, we'll provide the tools to stay on top of your finances and breathe easy.

Identifying Income Streams

There's nothing quite like the excitement of hearing that cash register ring or seeing that PayPal notification on your phone. But, as a business owner, knowing precisely where that money is coming from is essential.

First and foremost, identifying your income streams is crucial. It's common for many businesses to have only one primary income stream, though some have many.

Are you offering a service or selling a product? Maybe it's a combination of both. Regardless of what you're offering, make sure you're tracking every penny that comes in.

Income streams are the lifeblood of any business, and it's essential to understand how to calculate and track them for budgeting purposes. For service-based businesses, income streams may include fees for consulting, coaching, or other specialized services. It's essential to understand your business's different income streams and track them regularly to get an accurate picture of your business's financial health.

When it comes to tracking your income streams, you can keep things simple with a basic spreadsheet, but the easiest way to track your income and expenses is with a robust accounting system. .

Calculating your income streams is relatively simple. Add up all the revenue generated from each income stream, and you'll get your total income. It's crucial to track your income streams monthly to monitor any fluctuations in revenue, as this will help you adjust your budget or business strategy as needed.

Plenty of accounting software tools make this process more manageable and less time-consuming. Don't hesitate to invest in a quality accounting system or work with a bookkeeper to help you keep track of your income streams.

Regardless of your approach, ensure you're keeping detailed records of what's coming in and where. This will help you create a realistic budget but will also help you identify which income streams are the most profitable and where you can focus your marketing efforts.

So, grab your abacus and get ready to do some serious number crunching!

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Fixed Expenses

Fixed expenses are the things that keep your business running smoothly.

These expenses, like rent or mortgage payments, insurance, and software costs, don't change much from month to month. They can also include things like salaries, utilities, and equipment leases!

The key to managing fixed expenses is to know what they are and to plan for them.

When you create your budget, you should take stock of your fixed expenses and add them together. This will give you a good idea of how much money you need to cover your monthly basic costs.

Once you have a handle on your fixed expenses, you can start looking for ways to reduce them. For example, you might be able to negotiate a lower rent or switch to a cheaper insurance provider. You can also look for ways to make your fixed expenses more manageable, such as by spreading out payments over time or by taking advantage of discounts for paying early.

While fixed expenses may not be the most exciting part of running a business, they are essential to a thriving business. By managing them carefully, you can keep your costs under control and focus on growing your business.

Variable Expenses

You've got your income streams and fixed expenses down pat. But not everything about running a business is so consistent. Enter: variable expenses.

These sneaky expenses can make your life miserable if not properly accounted for.

Variable expenses, by nature, change meaningfully from month to month. The most common variable costs that most businesses have are expenses directly related to the income they're producing. These expenses are often called "Cost of Goods Sold" (or COGS).

While you can't always predict these expenses, having a system in place for tracking them is crucial. Understanding how your variable expenses fluctuate with your income, following the margin that your services are selling for with relation to the COGS, and being able to make predictions about how they will grow or shrink in the future can have a significant impact on your business.

Ultimately, the key to managing your variable expenses is staying vigilant and regularly reviewing your budget to ensure you stay on track.

With the right tools and strategies, you can keep your business running smoothly and avoid any surprise expenses that might otherwise throw you off course.

Reconciling Accounting Monthly

Ah, accounting – the bane of many entrepreneurs’ existence.

Let’s face it, keeping track of your finances is the key to running a successful business. That’s why reconciling your accounting every month is so important. It helps you get a clear picture of your cash flow, manage your expenses, and make informed decisions about your business.

Review your bank and credit card statements to reconcile your accounting and ensure all transactions are properly recorded in your accounting software. Ensure you correctly categorize each transaction in the appropriate income and expense accounts. This is where keeping a detailed record of your income streams and expenses comes in handy.

Once you’ve reconciled your transactions, you can generate reports to understand your business’s financial health better.

These reports can include profit and loss statements, balance sheets, and cash flow statements. Regularly reviewing these reports can identify areas where you can cut costs, optimize your spending, and improve your revenue streams.

You may be thinking, "Reconciling my accounting on a monthly basis sounds like a lot of work, is it really worth it?"

The answer is a resounding yes!

Not only does monthly reconciliation help you stay on top of your finances, it can also improve your overall business insights and decision-making.

First, reconciling your monthly accounting allows you to stay on top of your financial situation. By reviewing your income and expenses each month, you can quickly identify any discrepancies or errors and take action to correct them before they become more significant issues.

This can help you avoid costly mistakes and keep your business running smoothly.

In addition, monthly reconciliation can provide valuable insights into your business finances. By analyzing your income and expenses over time, you can identify trends and patterns that can inform your future financial decisions.

For example, you may notice that a particular expense is consistently higher than you anticipated, prompting you to explore ways to reduce that cost in the future.

Finally, monthly reconciliation can help you create a more accurate and realistic budget for your business.

By tracking your income and expenses consistently, you can better predict future financial needs and plan accordingly. This can help you avoid surprises and ensure your business stays on track to meet its financial goals.

In short, reconciling your accounting monthly is an essential task for any business owner. It may require some effort, but the benefits - including better financial insights, improved decision-making, and more accurate budgeting - are well worth it in the end.

Creating and maintaining a robust business budget is no small task. It's the first step towards achieving financial stability and success in your business.

By identifying your income streams, fixed expenses, and variable expenses, and reconciling your accounting on a monthly basis, you'll be able to make more informed decisions and stay on track toward your financial goals.

Remember, the key to effective budgeting is to be proactive rather than reactive.

Many business owners find working closely with an accountant, financial coach, or bookkeeper most effective. Finding an independent third-party to reduce the workload of running your business is a huge step towards regaining your freedom as a business owner.

Take the time to regularly review your financials, adjust your budget as needed, and make informed decisions based on your data. By doing so, you'll be able to avoid financial pitfalls and make the most of every opportunity.

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Jeremy Millar
Written by:
Jeremy Millar

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