How do you feel about budgeting? Does the mere word make you nervous?
You’re not alone.
Most business owners find managing their money to be a daunting task. But it doesn’t have to be!
Let’s breakdown the process of budgeting into 5 easy steps.
Categorize Your Income and Expenses
First ask yourself: How much money is my business bringing in each month and from where is the money coming? Don’t be alarmed by the number of income sources you have, this will depend on the type of business you run.
Whatever the case, you can get this information from a Profit & Loss statement provided by your bookkeeper.*
When it comes to your expenses, or more specifically your fixed costs, keep a running lists of payments that stay the same each month. This list could include rent, some utilities, payroll, website hosting or other subscriptions. An easy way to determine these expenses would be to go through your monthly bank statements and highlight the expenses that remained the same throughout the months. You can also get this information from a monthly Profit & Loss statement. The total of these expenses equates to your monthly fixed costs.
Consider the Variables
Some expenses are less predictable and vary monthly, like usage-based utilities and travel costs. But you can still account for these costs.
At the end of each month, make a total of all of your variable expenses. With each month that passes, you’ll likely notice a pattern in how these expenses fluctuate during different seasons and months.
Account For Unique Spending
At times, you may have to make a large one-time purchase, like a new device or furniture. If you know of one that you may need to make soon, include this cost in your budget. This will help you to set aside the funds for when the time comes to make the purchase.
You may also want to set aside money for unexpected expenses, such as repairs for a device. How much you plan to set aside here will depend on the calculation of your total net income.
Do the Math
Now that we’ve categorized the financials, use this simple formula to determine your net income:
This total will help you to better understand the profitability of your business. For example, if your net income is negative, you may need to cut out some costs or you can use your profits to make an investment in your business.
Cater Your Budgeting Practices to Your Needs
What would make budgeting easier, or even more fun, for you?
Some have created separate bank accounts for various sources of income and expenses so that the process is more automized and their financials are more clearly divided.
Because budgeting is rarely anyone’s favorite task, you may also want to try associating budgeting with positive things. For instance, why not order your favorite cup of coffee or listen to a stylized motivating music playlist while managing your finances? There are even “money motivation” playlists on Spotify that could really get you in the budgeting mood!
Regardless of whether or not this budgeting system comes easy to you, you may still want help understanding your calculations and determining what strategies you should implement to make your business even more profitable. That’s where we come in! If you’d like to work with a team of accountants who are dedicated to the success of your business, reach out to us! We’d love to work with you.