Budgeting is an important life skill that everyone should learn. In a previous piece identifying ‘7 Basic Financial Skills That Should Be Taught in School’, however, we mentioned budgeting as something most people don’t learn well or early enough. Indeed, this is one of many issues contributing to low financial literacy in many young adults.
Beyond the personal financial literacy factor though, budgeting is also important when you’re starting and running a business. For that reason, we want to provide a few pointers regarding what to know about business budgeting.
Getting Started
There is some flexibility in how each business owner handles a budget. However, there are also some fundamentals that every business owner should follow. These include prioritizing regular expenses such as leasing or mortgage payments, utility bills, payroll, and taxes –– as well as making sure that no legal decisions and contracts signed have any fine print that may, as NPR put it. Covering these basics makes for a great start.
Keep Track of Everything
If you never quite learned how to use Excel or another spreadsheet software, now is the time. Keep every receipt for everything you buy for the business, and input the data –– because you’re going to need it come time for taxes. You can (and should) use a tax preparation planner to help, and if necessary, you can of course pay for your business’s taxes to be done in their entirety. The best-case scenario however is that you learn the ins and outs of how your business will be taxed. This way you can not only take advantage of any legal deductions you’re entitled to, but, to the focus on budgeting, begin to factor taxes into your financial calculations. It gives you a more accurate gauge on how much usable capita you have on hand.
Personal vs. Business Budgeting
Budgeting in general can be defined as the process of looking at your finances to inform decisions about the future. However, personal and business budgeting are not exactly the same. AskMoney’s look at budgeting spoke to the differences between personal and business considerations. Essentially, personal budgeting has a focus on savings and investments, with decisions being made by the head(s) of the household. Business budgeting, on the other hand, involves multiple people such as the Chief Financial Officer, the Chief Operations Officer, and the Head of Finance. Together, people in these roles use the goals of the company and the trends from previous quarters to guide their decisions and plan for the months and years ahead.
Look for Ways to Cut Costs
This is a strategy for some time after your second year in business, since it requires the use of numbers from previous years. That said, the idea is to take a look at your top-line revenue and your bottom-line profit. If there isn’t a significant difference, you’ll need to look for some ways to reduce expenses. Common’s ways include consolidating debt (and negotiating lower interest rates), or downsizing your office or workspace. The latter is a particularly relevant approach in light of the pandemic. Per a Computerworld look at the future of work, a lot of businesses are expected to downsize anyway as part of the process of embracing a hybrid work model.
Create a Contingency Fund
“A penny for a rainy day,” as the saying goes. If business leaders have learned anything over the last two years, it’s that those rainy days happen whether you’re ready for them or not. It’s therefore best to factor contingencies into your budget, setting aside any surplus income you can. You can also invest and try to make some profit while still maintaining liquid assets. It’s a balancing act of deciding how much to invest, where to do so, and how much you should set aside in an account such as a certificate of deposit (which tends to have a higher interest rate than traditional savings accounts).
Managing business budgeting can be a hassle, but taking steps to protect yourself, your business, and your employees will help you in the long run. Don’t be afraid to ask for help from a part-time CFO or a tax preparer to make sure that everything is running smoothly. But ultimately, you should be able to boil your budgeting efforts down to a process you can manage in house.
