Budgeting is a skill that is neglected many small businesses but simply having one in place makes you less likely to overspend.
A budget is essentially a record of the money flowing into and going out of your business. Budgets enable you to set aside money for significant costs such as new machinery, loan repayments, or your company tax bill. Your company will be safeguarded in a downturn and thrive in good times if you let your budget guide your decisions. Because of this, developing a formal budget is an essential component of any successful business. Here’s how
Think about why you need a budget
Are you trying to add legitimacy to your business so that you can appeal for investment or debt financing? Or are you just trying to keep track of expenses to avoid overspending? If it’s the former, you’ll want to work with an accountant. If it’s the latter, you should be able to handle it internally.
Set up two business bank accounts
Set up a business checking account and a business savings account, separate from your personal bank account. All the money coming into your business should go through your checking account (this will help you calculate your total revenue). The savings account is where you will save for big future expenses.
Calculate the revenue for your business
Add all of the income streams for your business (e.g, sales, consulting, or freelance work) to your budget. If you are struggling to get close to a monthly estimate, try doing a best- and worst-case scenario.
Note down your initial costs.
If you’re yet to start your business, calculate the expenses needed to get things up and running. These could be your facilities costs (e.g., setting up your home office), capital expenditure (e.g. equipment), and other costs (e.g. company registration & other expenses).
Figure out your recurring expenses
Some of your costs repeat on a regular basis (e. g, rent, Wifi, business insurance). Tally these fixed costs up. If you are employing people, whether full-time or freelancers include those costs here.
Decide how much to save
Build savings into your budget so you’re always putting money aside. This can be a fixed sum every month (e.g. GH₵10,000) or a percentage of your total revenue. Then, transfer this amount from your business checking account into your savings account.
Set aside time each week to monitor how the business’ income and expenses are performing against the budgeted figures. Make adjustments where necessary. With the help of small business accounting software, this process can take as little as five minutes a week. If you want more expert input and support around your tax bill, consider working with an accountant.
Although there’s plenty of budgeting software and people explaining how to budget out there, the most important thing is to not feel overwhelmed.
If you are just starting with your budget or are simply trying to formalize your budgeting process, it’s better to get moving with a simple budget than to get stuck on a complicated one and end up throwing in the towel altogether.
In practice, that means using budgeting tools that are connected to your sales or accounting software so that you don’t have to spend hours each week manually inputting data.
To ensure you can weather the ever-changing nature of business, use your budget to inform your strategy and decision-making.
For example, if you’ve just had a great month of sales, it should mean that your budget for the next month (e. g, your marketing budget) can increase.
This way, you can continue to drive growth in your business – if that’s what you want.
On the other hand, if you’ve made less money this month than you were expecting, your budget for the next month will likely have to decrease. Keeping your budget flexible and adaptable will let you protect your business when times are tough and make the most of boom times.
Keep expenses to a minimum
In the early days, the fewer non-essential expenses your business incurs, the faster you can get to profitability.
Putting meals and taxi rides on the business account might seem tempting, but this will just eat into your profit margin and affect how much money you’ll be able to take out of the business – either in savings or to pay yourself with. Also, remember that financials should always be near the top of the agenda when it comes to any monthly management meetings.