If you’re a freelancer, self-employed, or own a personal business, then you’re going to need a budget. Like a personal budget, your business budget will help you keep track of your income and expenses. However, a business budget is more critical since it can help you make important business decisions.
Admittedly, budgeting for your business can be intimidating, and some people don’t even have a budget at all. While running a successful business without a budget is entirely possible, one mistake could ruin your finances.
Anyone looking to build a sustainable business would be wise to become a savvy budgeter. Here’s how to make a budget for your personal business.
Check your revenue
The obvious place to start with your business budget is your revenue. Without consistent income, your business won’t survive for long. Take a look at your different revenue streams and add them all up. This will give you a baseline of what you’re working with. The tricky part for business owners is that revenue can fluctuate quite a bit, so you need to plan accordingly. For example, your business sales in November and December might be 3 to 4 times more than your other months.
Keep in mind that you should be tracking your revenue, not profit. Revenue is the total amount of dollars that are coming in before expenses. Profit is calculated after deductions. So while deductions are important, that’s the next part of your budget that you’ll need to worry about.
Calculate your expenses
The other significant part of a business budget is your expenses. The first thing to consider is any fixed costs that you may have. These are costs that won’t change much each month and include things such as:
● Debt repayment
Each business will have different expenses, so you may need to consider additional costs that are not listed but relevant to your business.
In addition, every personal business will likely have variable expenses. Think of these expenses as costs that come up as needed. Sometimes they happen once a year, while others may only occur when you need to scale up. Some variable expenses include:
● Your salary
● Advertising and marketing
● Office supplies
● New equipment
With all of your monthly expenses listed, you can subtract them from your revenue. That number gives you your monthly profit, so you’ll know how much you’re making. More importantly, by adding up all of your expenses, you’ll know your hard costs each month to maintain your business.
Set aside an emergency fund
One thing that many business owners forget to budget for is emergencies. But let’s be honest, an emergency will come up eventually, and it could be devastating for your business.
As a general rule, you’ll want to set aside at least three months’ worth of expenses. By doing this, you’ll have a buffer if your business experiences a downturn or something comes up that prevents you from focusing on your business, such as a medical procedure. There will also be situations where an unplanned expense comes up, including repairs or replacing equipment.
The tricky part about emergency funds is resisting the urge to spend them. When you have excess cash sitting in your bank, it can be tempting to spend on something that could grow your business or pay yourself a bit more for the year. While there’s nothing wrong with those two ideas, you don’t want to do it with your emergency fund. Instead, save that money as something will come up eventually.
Start thinking about the future
With your budget and emergency fund in place, you can plan for the future. As mentioned, many business owners know certain months will be lean, so you’ll want to avoid making any capital expenses at that time. Instead, wait until a month where you have increased profits since you’ll have the cash to spare.
You’ll also want to think about your long-term goals. That might include scaling up your business by offering more products, introducing online shopping, courses, or more. Of course, most of these goals usually come with a cost. By looking at your budget, or adjusting it, you can start saving for those goals.
Find a system that works for you
Budgeting for your personal business is not easy, but there are tools out there that can help you. There are apps and software that can track your income and expenses. You could also hire a bookkeeper to look over your numbers to ensure you’re on track. Some people will even do things manually with a spreadsheet.
Find a system that works for you and own it. Although budgeting may not be fun, it’s essential to your business. If you know how your financials are doing at any given time, you can manage your business accordingly.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.
Barry Choi is a paid spokesperson of Sonnet Insurance.