When you run a business you have one goal in mind: to make money. You can not make money if you don’t know how to budget your expenses. Establishing a solid spending plan will ensure your business generates a profit – and you make the money you are after.
There is an old saying that goes “you have to spend money to make money.” This is true to an extent but you also have to be practical. Renting a big expensive office may make your firm look larger but it is not going to make you better and until you have the income to validate such an expense you just might want to rent a smaller office. The same is true for many other business expenses.
By establishing a basic business budget, you can see exactly where you want to spend the big bucks – and where you want to pare down expenses. After all, there is no need to buy 1,000 reams of top end business letterhead if the vast majority of your correspondence is via email. That money would be better spent elsewhere.
Maybe you can justify spending $12,000 a month on billboard coverage on a major thoroughfare. Great! But if that $2,000 telephone book advertisement is not bringing in clients, then ditch it. Be smart with the way you spend your money and you will reap the financial benefits.
Some people may scoff at the mere idea of establishing a solid spending plan for their business but those who are successful know a good business budget offers a lot of benefits:
- Budgets help you get ready for the future. Learning how to control your expenses will help you establish solid spending habits that will help you sustain your business should another economic downturn come your way. Business people who have no idea how to control costs are the first ones to lose it all when business drops.
- Budgets give you freedom to spend. When you know exactly how much money you have in your advertising account, it is much easier to say yes when a great deal comes your way. Be careful not to waste important advertising dollars today and you will have the funds available to splurge another time. Managers who have no idea how much they can spend on a promotion often overspend thereby limiting their profits and making the campaign useless.
- Budgets help you accomplish more business goals. When you have a set budget to work with you can more freely take risks that could lead to larger profits. Knowing exactly how much money you have available and what expenses are coming up can give you a sense of freedom since no surprise bills will disrupt your plans.
How to set a realistic budget for your business
Not everyone is good at devising a workable spending plan. But it does not have to be complicated. The first step is to determine the amount of money you have to work with every month. This can be done by simply estimating your income by averaging the amount you have taken in each of the last six months. This should give you a good idea of what to expect regarding income levels.
Next, start looking closely at your monthly expenses. Be sure to include all of the small incidentals that may rob you of your profits. This might include membership fees, lunches, employee bonuses, etc. Of course you will also include your larger expenditures like insurance, taxes, rent, utilities, inventory, salaries and more. Be careful not to forget irregular expenses that may not appear in your ledgers on a regular basis. These have the tendency to eat away at your profits if you are not careful.
Once you know exactly how much you are spending, you can compare that amount to your income. If you are spending too much you will have to go back to the expenditure list and start looking for ways to cut expenses. Take time to look for expenses that are not necessary or may be repeated.
Another way to establish a business budget is to list the different categories your expenses may fall under such as facility costs, employee costs, supplies etc. then create budget amounts for each.
Establishing a good working budget for your business will take some time but if you are diligent you should be able to create one that is easy to follow and also effective in helping you reap the most profits.