One key to being successful in any business is understanding your cash flow. It is essential you know when your bills are due, how much you owe, and that your customers are paying you on time. For a large business with a complicated budget, an accountant can help you get a handle on your finances and establish a budget that helps your business grow.
If you are just starting your business or want to manage your small business finances yourself, a budget you understand and will use is a necessity. Your budget does not need to be intricate or complicated. It should be easy to use and update so you have a tool to use any time you are making financial decisions. Anything that helps you manage your finances successfully is a great budget.
A budget is really an educated guess. While you can’t be sure exactly what your income or expenses will be each month, you can make a close estimate and plan accordingly. The longer you have been in business, the easier it will be to accurately predict your income and expenses. Even if you are brand new to the business world, you need a budget to help you plan for short term and long term growth.
To set up a budget that covers all parts of your business, use these basic steps:
- Know your income. As a trade professional, this number can vary each month. Make it easy to adjust your budget to accommodate any additional or decreased income. In your budget, your incoming money is called your revenue. The best way to estimate your future revenue is to look at your past few months. Use your contracts to estimate how much money will be coming into your business.
- Plan for your fixed expenses. These are the bills that are constant every month. This can include rent, mortgage, car and equipment payments, loan payment, utilities, insurance, websites, and employees. Any bill that has a set payment date and is the same every month can easily slide into your budget because it never changes. This number will carry over from month to month.
- Leave space for variable expenses. These change every month and probably include purchasing materials for a specific project, necessary permits, advertising, and contract employees. While this may change frequently, all these expenses need to have a line in your budget so you plan for and pay these bills. Keep in mind that you will have one-time expenses as well. If something breaks and needs to be replaced or it’s time to upgrade, these expenses will take a bite out of your budget. Establishing a savings fund for these unexpected costs will help you better plan your long term budget.
- Create a profit and loss statement. This is the end result of your cash flow planning. You will be able to see if your business is making or losing money, and how you can trim costs. Add all of your income and subtract all of your expenses. The end result is your monthly profit. A simple spreadsheet program can help you do this. If the number is negative, don’t give up hope. Not all businesses make money each month, especially new businesses. It’s expensive to get started with lots of up-front costs. But knowing where you stand will help you make better businesses decisions in the coming months.
- Create a budget for the next month. Based on all the information you have gathered, you can now create a budget for the coming month. Knowing your profits and loses will help you decide if you need to trim expenses or if it’s time to hire new employees. You’ll know if you can afford a payment on a larger office or an upgraded piece of equipment.
Your budget is not set in stone after you do this initial planning. This is just the start. As your financial situation changes, you can adjust your budget to better fit reality. If your business income fluctuates frequently, a budget is even more important to keep you on track to meet your yearly financial goals.
There are a number of resources that can help you keep track of your budget. Some business programs will keep track of your invoices and expenses. There are many templates available online that can help you categorize your profits and payments as well. An accountant is a professional that understands budgets and taxes, and can help any time you have a financial question about your business. Even if you choose to do it all yourself, you can make a budget simple enough to manage every month and learn how to best run your business from it.