How to Make a Budget for Your Business
Maybe you’ve decided to start your own business (congrats), or maybe you’re already running one (also congrats). In either case, you need to make a budget. But where to start? Our friends over at Xero share their top tips for making a rock-solid budget. And to make it all even easier, be sure to link your Square account to Xero in our App Marketplace.
A budget is the financial plan for your business. It’s the blueprint for how you achieve your goals and ultimately make your business thrive. It’s also what you should consult when making any significant spending decisions. The tips outlined in this article can help you create a budget that guides your business to where you want it be.
Expenses versus revenue
A budget in its simplest form is a list of all your expenses and sources of revenue. Revenue must exceed your total expenses for you to turn a profit. Otherwise your business just isn’t making it and you need to cut spending.
It’s also important to understand the difference between fixed and variable expenses. Fixed expenses, like rent and utilities, stay constant as your business changes. Variable expenses, however, change with your revenue. You often need to spend more on the resources that fuel your business as demand for your product or service grows.
Set realistic goals
Your budget is where you outline your goals for the coming year. It’s an opportunity for you to review the progress you made during the past year and come up with a plan to keep the momentum going.
Make sure to be logical when setting these goals. While you certainly should aim high, you need to include detailed plans on how you’ll accomplish your goals. You also need to account for the increase in your variable expenses that come with growing your business.
Let’s say you own a car wash and want to double your previous year’s revenue. Unless you plan on raising prices, you probably need to double the amount of cars you wash. That might mean opening a new location, hiring more employees, ramping up marketing, or buying more efficient equipment. Deciding what you can spend on expanding your operations and what it should equate to in new sales should help you come up with realistic goals.
Regularly revisit your budget
The budget you start the year with likely won’t be the same by the end of the year. You need to reevaluate your plan every month or so and tweak it based on your business’s performance. This is also a chance for you to dig deep and discover what is and isn’t working for the business. Maybe your sales are exceeding expectations in a certain area. Or perhaps you underestimated a certain expense. This is your opportunity to make the necessary adjustments.
Be sure to also keep your original budget close by. You can compare it against the revised versions and see how reasonable your original goals actually were.
Be prepared for anything
The unexpected can and will happen when you’re a business owner. It might seem unusual, but you should budget for the unforeseen. Setting aside some money in a rainy day fund is never a bad idea — but might not be practical for a newer business with limited funds.
Another option is to simply be conservative when budgeting. Assuming your costs will be higher and your revenue will be lower than what you actually expect can’t hurt. It creates a cushion that can help your business weather any unexpected storms.
As the saying goes, “a goal without a plan is just a wish.” Having a well-thought-out budget can take your business to new heights.
– Dave Anderson (Xero)
Xero is beautiful online accounting software for small businesses. Sign in any time, anywhere, from any device. You can link your Square account to Xero in Square App Marketplace.