Maybe you’ve heard rags-to-riches business stories — a small candle company gets started in someone’s garage and becomes a six-figure success, or an app idea transforms technology (and a bank account!) overnight. Not every entrepreneur will experience that amazing mix of luck and hard work, but that doesn’t mean you can’t grow wealth in your business. It all begins with a budget. Here’s why you need a budget for your small business and how sticking to it can skyrocket your bottom line.
What is a budget?
Budgeting is a proposed income and spending plan for your business. And you know what they say: a failure to plan is a plan to fail. A budget places boundaries around your business and prevents financial mishaps. Without budgets, business owners run the risk of making uninformed decisions that could lead to mountains of credit card debt, loans you can barely pay interest on, and worst of all, discounting your products and services for a quick sale.
A budget serves as the compass for your business and its activities. For example, if you have income budgeted for one-on-one clients during August, but you are launching a group coaching offering, you are heading in the wrong direction and need to course correct. You may amend your budget to anticipate income from the appropriate product/service or reset and focus on building one-on-one client work as you previously outlined in your budget.
A budget is a great accountability partner, helping guide and shape your business growth.
How should I budget for a small business?
Budgets should fit the cycle of your business. If you are a seasonal business, like a wedding photographer in New York, NY, your budgeted income in January, February and March is likely very different from your income in August, September, October. Conversely, your budgeted expenses are most likely not the same and should be modified accordingly.
I believe that every dollar earned in your business should be assigned a specific job. Here’s a few jobs you can assign your money:
Your salary: You should pay yourself each time you make a sale. By not paying yourself, you may be building resentment toward your business.
Your profit: I believe you should take quarterly profit disbursements.
- Operating expenses: Based on the revenue in your business, expenses should be a certain percentage of your overall revenue.
Taxes: Yes, you should be putting money aside in an account for Uncle Sam. I recommend 15 percent of each sale should go into savings for tax time.
Cash reserves: I recommend building three months of expenses in this cash reserve. This can also be the place that you save money for those bigger investments, like salary for a new hire or a new website.
How to stick to your budget
We all face financial temptation, and it’s a big hurdle for any hustler. When faced with temptation, we’re more likely to create unrealistic budgets that are not aligned with the reality of our business’ current sales — both actual and projected.
Some business owners believe they need to invest in high tickets items, thinking their sales will grow exponentially as a result. Think Field of Dreams – if you build it, they will come! But your business is not a movie starring Kevin Costner – it’s your livelihood. And if you have employees, it’s their livelihoods, too. Building budgets not based in reality and baked with temptation is known as silver bullet budgeting. You should never use silver bullet budgeting.
If you find yourself building a silver bullet budget or you have created a sound budget and are tempted to purchase something that is not already in your budget, call your bookkeeper. Don’t have a bookkeeper? Call your most financially responsible friend and share your desired high ticketed new budget item. Share all the details – what it would cost, how long it will take to create/implement, and what you know. Crunch the hard core numbers, and show the ROI on the high ticketed budget item.
I’m willing to bet a few things:
They will not give you a green light at the end of the conversation, for no other reason than the fact that they know that you are emotionally attached. Sound business decisions should never be solely made with emotion.
If you can’t outline the ROI or how you will modify your operating expenses to absorb the cost of this high ticketed item – they will ask you to take some time to determine ROI and modification of budget and increased sales growth resulting. (P.S. Your bookkeeper could run those numbers for you.)
They may outline why it may not be a sound investment and talk you out of it.
If your bookkeeper and friend can’t talk you out of it, hit ‘pause’ and do not commit for 72 hours. If you can’t seem to shake the idea of what this high-ticket investment will provide your business, I want you to go back to your budget and begin considering areas where you can make operating expense cuts. Under no circumstances can you cut your paycheck, your profit or your taxes – these areas are totally off the table.
The bottom line
Creating a budget that fits your current business is the only way to go. You can still invest in your business to initiate growth, but a solid budget will help you understand where to best put those investment dollars to maximize your profits and hard work.
Thanks for reading. Please keep in mind that The Wellness Bookkeeper, LLC and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this website do not constitute legal advice and is not be held liable.