Many people have a hard time making or sticking to a budget for their small business. After all, it’s difficult enough to follow a budget in your personal life!
So, how can you be sure that you’re budgeting the right way when it comes to your business? You’re starting strong by reading what the experts have to say.
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. In all that time, we’ve spoken to thousands of business owners who want to know:
- What problems do small business owners face with budgeting? What variables do I have to consider?
- What categories should I divide my budget into? How much money should fall into each?
- How can a financial advisor or accountant help me budget?
Problems With Budgeting & Variables to Consider
You need a budget because it helps you forecast your future expenses to make sure you can pay your bills. This includes the expenses you know (fixed expenses) – and the ones you don't (variable expenses).
In fact, not having a budget is one of the top five financial reasons we believe businesses fail.
Budget Variables
However, making one is easier said than done. Not every budget is going to look the same. There are going to be variables in establishing your budget, such as:
- How large your business is
- How long your business has been in operation
- Which region your business is located in
- Which industry your business operates in
- Whether your business offers a product or a service
These variables will affect which expense categories you have and how much revenue your business will have to budget with.
Overcomplicating Expense Categories
Aside from factoring in these variables, the most common issue that small business owners face while trying to make a budget is overcomplicating it. Don’t break categories down to get too specific; keep them more general. Focusing on small numbers will make you lose the overall picture.
Next, let’s dive into what a generic small business’s budget may look like.
Dividing a Budget Into Categories & Amounts
After establishing that each business will have different expense categories and different revenue to budget with, we still have to talk about what a budget may look like.
Let’s look at examples of expense categories and how much of your revenue should go into them.
Examples of Expense Categories
Even though each business may have a different number of expense categories, you’re going to want no more than a dozen. Remember, they should stay more top-level and avoid getting too specific!
Examples of good expense categories include:
- Labor and benefits
- Rent or mortgage
- Office expenses
- Marketing
- Cost of goods (if you’re a product-based business)
How should you budget for each of these categories? Since the number of categories and total revenue will vary, we can only talk about some approximate percentages and limits.
Budgeting for Labor and Benefits
Service-based businesses are going to put the most money here. In fact, they’ll typically put a third of their revenue into this category. Even with the highest labor costs, service-based businesses should never put more than 50 percent of their revenue into this category.
On the other hand, product-based businesses will put much less into labor, but the amount will heavily depend on their industry. Regardless, if they do have labor costs, they should not exceed 30 percent of their revenue.
Budgeting for Rent, Mortgage, and Office Expenses
Rent or mortgage and office expenses are mostly going to depend on the industry that you operate in and the region you’re located in. However, it should never exceed 15 percent of your revenue.
Budgeting for Marketing
Marketing is going to mostly depend on your business’s lifecycle stage. Marketing expenses should generally not exceed more than 30 percent of your revenue.
However, if you’re trying to grow your business, most of the money that would be profit should be reinvested into your marketing.
Budgeting for Cost of Goods
Cost of goods is only for product-based businesses. Products can have a significant range in cost, so this will heavily vary by industry and the market. Regardless, cost of goods should never exceed 50 percent of your revenue.
Budgeting Advice: Financial Advisor vs. Accountant
If you’re still not sure how to put together the best budget for your business, help is available!
Financial advisors only assist people with their personal budgets. Meanwhile, accountants who work with your business year-round – such as monthly accountants – can help you with establishing a business budget.
At CSI Accounting & Payroll, monthly accounting is our specialty. Each month, we review your financial statements with you, and we can even go back and review the past year of spending. By using your actual data, we can put our heads together to see if your budget is working for you.
Because you know your business the best, we think you should have a majority of the say in building a budget. However, if you need us to create your budget for you, we can do that for an additional fee as a consulting project.
Remember, nobody ever gets their budget completely nailed down on the first try! You can – and should – modify your budget as your business grows and changes. If you have a monthly accountant by your side, you can talk about changing your budget as much as you like.
Make a Budget Using Your Own Data!
Now that you know about common problems with budgeting, variables to consider, categories to use, and how a monthly accountant can help, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI by clicking the image below:
