Budgeting is something we don’t do enough of as small business owners. I think we either don’t have the data to be able to forecast next week, never mind next year, or we just don’t see the value in it.

Creating a budget is one of those things that’s important but not urgent, which makes it a tough sell for busy small business owners. We spend so much time putting out fires, trying to get the urgent things done, that it can be tricky to make space in our schedules for important but not urgent tasks.

If you set aside 30 mins this week to make a budget for the next twelve months, I promise it will help you to make better financial decisions.

Why do we budget?

Doing business without a budget is like going on a cross-country road trip without a map. You’re never sure when the next small town is going to come along. Sometimes that’s ok because you just put gas in the car, and sometimes that’s bad because you’re driving on fumes and you really need a bathroom.

Having a budget will allow you to plan for the future, to have a good idea of when your income will be generated and when your expenses will be incurred. With a plan, you can be a more agile business owner because you can react to the environment you’re in and know you’ll be ok.

You can make decisions based on facts and stop guessing – you’ll have a much better view of the future for your business.

It also allows you to save money for bigger purchases and to invest in the growth of your company. If you’re never able to invest in your company, whether it’s better equipment, spending more on advertising or being able to outsource, you’ll find that at some point you just can’t make any more progress.

Creating a budget can shed some light on you’re current spending. It might feel like you only spend a few dollars per month on sandwiches or apps, but it might actually be a few hundred. You can’t change what you don’t know, and often our feelings about money are very different from the facts.

Five Steps to a Simple Budget

Budgeting sucks, I get it. It’s like taking cough syrup or something. It tastes awful but it’s going to help our business get better.

Let’s try to get it done as fast as possible, because the sooner we have a budget, the sooner we can use it to guide our strategic decisions (I’ll explain this later).

Step One: How do you spend money?

Start by writing out a list of all the things you spend money on. Write down everything, even the really small stuff that seems insignificant.

If this is your first year in business, write out what you know you’ll spend money on and what you think you might spend money on. Try to keep it within the realm of “fairly likely” and don’t get to far into “maybe”. You want the budget to be as accurate as possible, and if you put too many uncertain expenses in, it’s unlikely the end result will be a true representation of what it will take to run the company over the next year.

If you’ve been in business a little while, pull out your income statement from last year. This will be super useful in creating this year’s budget because you can use what happened last year to help you estimate this year.

Step Two: How much do you spend?

The next step is to write down how much you spend on each thing every month. Maybe start a spreadsheet or create a table in notebook or something. I recommend creating columns for every month plus the total. Budgeting monthly will give you a more accurate picture than trying to budget for the year and then dividing by twelve.

Here’s an example:

In the example, I only get billed for water every two months, and I know I’m going to need printer ink in April (because tax season), so I increased my office supplies expense by the amount of printer ink. I also know it gets slower in the summer, so I probably won’t need to buy office supplies again until the fall.

Keep going until you have everything you spend money on and how much you spend on it. Use your income statement from last year to help you.

Try to research anything you don’t know so you can get the best number possible, but don’t stress about it.

In the end a budget is just an educated guess anyways.

Some costs will be difficult to estimate at this point because they’re directly related to sales. Like if you take credit cards, your transaction fees are directly related to the dollar amount processed. Just leave those for now.

Step Three: How do you make money?

Just like we did with expenses, list the ways in which you make money. For example, if you’re a gym owner, maybe some people pay you a monthly subscription fee. Maybe you also sell personal training packages, and nutrition supplements. List all of these things. If you’re not sure if you should list it, ask yourself if you would include it in any other category you’ve already got. If the answer is no, write it down. If the answer is yes, include it with the other item.

Step Four: How much money do you make?

Create a table similar to the one above, but this time for the thing(s) you make money from. How much do you expect to make every month? If you have your income statement from last year, I would use it to put in the months for this year. Then change whatever you know will be different. Maybe you signed a new client so this Jan will be higher than last Jan, or maybe a contract will be ending in March so April will be lower than last April.

If you’re new to business, you can leave these blank or take your best guess. I encourage you to only put in a number if it’s fairly certain. You’re better off projecting revenue that’s too low, than too high.

Step Five: Costs Related to Sales

Now that you have your sales numbers in place, you can calculate the expenses that are based on sales, like transaction fees, subcontractor expenses and other direct costs.

When you’re all done, the table should look something like this:

You’ll probably have more expenses and maybe more sales lines, but the format should be similar. I’ve estimated the income taxes at about 15%, but you should use your tax rate. It’s important to include taxes because otherwise they end up feeling like a surprise at the end of the year. Budgeting for income taxes will give you an idea of how much you need to save every month.

It’s done now, but what do I do with it?

Now that you’ve finished your budget, have a look at the year. Does it look the way you though it would?

Keep comparing your budget to your bookkeeping every quarter (or preferably every month). It’s important to understand where you’re going over budget and where you’re under budget. The sooner you recognize you’re straying from your intended course, the easier it is to make adjustments and avoid surprises.

Comparing the budget to your actual bookkeeping will help you find out where your financial strategy is missing the mark and how you can create a more accurate budget for next year.

If you’d like a hand with your budget I’d be happy to help you. You can fill out a contact form: https://www.kirkcpa.ca/contact

Kaitlin

P.S. Today we created a simple and straightforward budget. We’ve really just scratched the surface of budgets, have a look at “When Budgets Break Bad” for some insights on how budgets can go sideways and what to do about it.