How to Create a Business Budget in 3 Simple Steps
Do you ever look at your business financial statements and ask yourself “where did all the money go?”
In the early days of my business, I didn’t have either a business budget or a financial plan for my business. I showed up to do what I was hired to do, got paid, deposited cash in the bank, and purchased things for my business as needed.
But when I finally did look at my business numbers, I was overwhelmed by the mess. I had no idea how to effectively price my services or how to allocate money so I wasn’t wasting it on things that weren’t contributing to the bottom line.
Without a business budget, it can often feel like you’re “flying by the seat of your pants” and hoping things work out. This approach often leads to a lot of mental angst, questioning, and uncertainty. If any of that sounds familiar, don’t worry.
In this article, I’ll help you create a business budget that will save you headaches, money, and time so you can confidently manage your business without wondering where your money’s going each month.
A Business Budget Can Save You Time and Stress
A business budget is an essential tool to help you run a profitable business because it helps you plan better, manage your cash flows, and minimize unnecessary expenses. Having a business budget will also help you:
Save time by automating decision-making
A business budget allows you to automate some of your financial decision making. This lets you spend less time trying to minimize expenses and more time doing the things that contribute to consistent revenue streams. These are usually the activities that only YOU can do in your business…and that you hopefully enjoy doing as well!Be prepared for the unexpected
A business budget allows you to prepare for months when you might have larger cash outflows and smaller inflows. Some outflows, like quarterly taxes, can be planned for in advance. But there will always be unexpected costs or situations that you should be prepared for as well (like a business slowdown because of a pandemic).
Increase efficiency by investing strategically
A business budget gives you a framework for strategic investments to grow your business. Instead of making unintentional impulse purchases in your business, you now have a plan for investing in things like marketing, hiring, or purchasing additional products or software that make running your business easy and efficient. When you see your expense budget ahead of time, you’ll be more conscious of how to allocate the resources in your business to make the most of every dollar.
Prevent impulse spending
A business budget makes it easier to stop yourself from making unintentional impulse purchases in your business. Because while it may feel good in the short-term, having the cash in your business to help you sustain a profitable business that creates a legacy is even more rewarding and fulfilling.
By putting together a business budget, you are telling your money where to go instead of wondering where it went.
Creating A Business Budget Doesn’t Have to Feel Overwhelming
Before diving into any numbers, the first step is to ease any stress or overwhelm you may be feeling about creating a business budget by shifting your mindset. This will help you enjoy the process and even be grateful for the fact that you have a business for which you’re creating a business budget!
I look at putting together a business budget like putting together a puzzle. The cover of the puzzle box is that vision of what I want my life to look like as a result of running a healthy, profitable, and sustainable business.
Before you start putting together your business budget, write down the “why” of what made you start your business along with a list of your top 3 goals for your business. This will give you a boost of excitement as you get started.
Now think of all the different parts of your business as being the puzzle pieces that’ll help you get to your ultimate vision. When you create a budget, you’ll know exactly what pieces of the puzzle to put together. You’ll no longer feel exhausted trying to make sense of all the different pieces of your business being scattered all over the place!
So here’s how to create your business budget in just 3 steps:
Step 1: Track and Review Your Revenues and Expenses
The first step in putting together a budget is knowing where your revenue is coming from and where your money is going. Start by taking a look at your Profit & Loss statement for your company for the past two years.
If you use an accounting software like Quickbooks, you can download the Profit & Loss statement as a report in your Business Overview tab. If you have an accountant or bookkeeper, you can ask them to provide this report for you.
If you don’t use accounting software or don’t have access to an accountant or bookkeeper, you can document expenses in your businesses by looking at your bank and credit card statements for the past year.
Step 2: Project Revenues and Expenses for The Year Ahead
To project your revenues for the year ahead, start by looking at the sources of revenue in the past. Can you think of anything you’ll be doing differently this year? Here are some questions to consider asking yourself to project revenues in your business budget:
Are you anticipating any income changes? Up or down?
Will you be changing your pricing on existing offerings?
Are you adding new offerings or services?
Are you adding additional streams of revenue such as through partnerships or affiliates?
Next, consider how each expense category in your Profit & Loss statement has contributed to revenues in the past. As you look at your expenses for previous years, you may want to dive deeper into the breakdown of your expenses per month so you can determine which ones are recurring and which ones are one-off expenses.
Recurring expenses are ones that happen every month, quarter, or year to keep your business running. Assess your recurring expenses to ensure they’re still necessary and contributing to profits. As you review non-recurring expenses, consider how you may need to adjust your budget for one-off expenses in the future.
Here are some questions to ask yourself to help you project expenses for the year ahead:
Are you expecting changes in the pricing of the inputs required to complete your services or projects (such as labor or materials)?
Are you expecting an increase or decrease in operating expenses (such as rent, office expenses, marketing, advertising, technology, or software subscriptions)?
Are you expecting changes to payroll as you increase or reduce headcount or increase pay for current employees?
Are you expecting new purchases to grow your business or to invest in your business education to further enhance your or your team’s skills and service quality?
Step 3: Set A Budget Based on Your Business Goals and Metrics
Having clear financial goals and metrics in mind will help you create a budget that sets you up for achieving those goals faster. So take a few minutes to think about the big-picture goals of your business:
What do you hope to achieve financially in the short-term and long-term?
Do you need to increase sales by a certain percentage?
Do you need to reduce expenses by a certain amount?
As you look at your Profit & Loss statement, you’ll likely see these key metrics:
Revenues
COGS
Gross Profit
Operating Expenses
Net Profit
Set a target budget for each of these 5 metrics using your goals and the work you did in the previous two steps.
📖 Learn more about the 7 Key Metrics in Business You Should Track Monthly to Increase Profits.
When I first started a business budget, I just used these 5 metrics as my anchor points. Once I eventually saw the need for more detail, I moved to line-item budgeting. So if you want to start simple, I suggest doing the same and creating and tracking a budget for these five key metrics. Later on, you can always add budgets for more detailed items such as the categories within your operating expenses.
Want to see a sample budget distribution chart to help you determine how much of your profit should be allocated to each expense category? CLICK HERE to download my free business budget template and guide for creating budgets in Metrique.
A Business Budget That You Can Stick To!
If you’ve been following the 3 steps above, you’ve been able to create a business budget that can help you save time and grow profits in your business. As you make adjustments to the budget throughout the year ahead, just keep the 3 steps of creating a business budget in mind:
Track and review revenue and expenses
Project revenues and expenses
Set a budget based on goals and metrics
Now how do you ensure that the benefits of creating a business budget actually translate into improved profitability in your business? By making your business budget easy to track so you can stick to it!
For best results, track your business budget at least once a month. Luckily, this doesn’t mean you have to spend hours creating multiple spreadsheets every month. Simply click here to see how fast and easy it is to track your budgets in Metrique and sign up to simplify your business today!
Developing a well-crafted budget might take some effort in the beginning, but you’ll feel proud of yourself for taking ownership of your business in this way. Plus, you’ll reap the rewards as your business runs smoothly and prosperously for decades to come!
🎧 Learn more about how to run your business with your budget in mind in this episode of Profit is a Choice: Managing your company to a budget.