Budgeting for your small business would be much easier if it only required adding up your fixed expenses. However, when you throw in variable expenses, it can be easy to go over budget. How can you expect the unexpected and get a more accurate idea of what you should be spending?
Best Practice For Setting a Small Business Budget
Why do I need a budget?
- Start by finding your revenue, or the money that comes in before you deduct all of your expenses. Don't confuse your revenue with your profit.
- Fixed expenses are the easy part. These can include mortgage, loan, and salary payments, as well as other costs that don't vary on a regular basis. Subtract them from your revenue. Reducing the number of fixed expenses can help you set more money aside during a difficult month - do you need all of those subscriptions?
- Identify your variable expenses. These can include utilities, office supplies, hourly payroll, and other expenses that don't have a consistent amount on the bill. Expenses that are more optional yet can be considered discretionary expenses, such as bonuses and meals for your employees. Variable expenses should be kept to a minimum when you're a newer business, but they can be more difficult to control than they appear. It might help to find your annual average for each variable expense by comparing the expense over the last 3-5 years and using the highest average annual amount as your guideline.
- Find opportunities to add wiggle room. This can be either in the form of adding a buffer of 3-10% (depending on how much your business can spare) or setting aside unused funds each month to create a savings account to cover the variations in cost.
- Finally, create a profit and loss statement on your own, with the help of accounting software, or with the help of an accountant. This can be done after tracking your spending each month and comparing it to your budget for each individual variable expense.
- Now you can create or modify your budget for the future. Each year, you should review your budgets for each category to see where you have the most flexibility and control. A lot of this involves investing in resources that can help you reduce your variable expenses, such as obtaining new equipment, software and outsourced tech support, automated utility devices (such as a scheduled thermostat or automatic lights), and more!
Ready to learn more?
Take the time to get back to what you love; consider hiring an accountant to review and manage your new budget. CSI Accounting & Payroll's accounting team will go the extra mile to ensure you're covered year-round! Click the button below for a free consultation, and we'll see if we're a good match for each other.