Envelope budgeting can help business owners better understand their expenses and manage their money. It’s a creative budgeting solution for those interested in getting a better handle on their business’s cash flow.
What is envelope budgeting?
Envelope budgeting is a popular method of saving money and managing spending that uses envelopes to organize and manage expenses. Envelope budgeting is a common personal finance management technique, but you can apply the principles to small business cash flow management too.
Using this budgeting method, you can use envelopes to store cash for specific expenses. You can categorize envelopes by expense, and each envelope contains enough cash to cover the cost of the cash outflow.
When you use a cash envelope system for personal finance management, you’ll often use actual cash and physical envelopes. Financial management tools, like budgeting software, have made it possible to practise envelope budgeting but in a more secure, digital setting.
How does an envelope budgeting system work?
The budget envelope system works by helping you categorize your spending and set aside funds to pay for specific expenses. The process is relatively simple: As you earn money, you distribute it among your envelopes. Then, once the deadline for an expense arrives, you “spend” the cash from its envelope toward that cause.
For example, say you have an envelope for your insurance costs, where payment is due at the end of the month. You can save all month, putting aside funds into your insurance envelope. Then, at the end of the month, you remove the money from the envelope and make your payment.
In business applications, using digital tools to apply this technique is easier and more secure than physical envelopes.
Benefits of using a cash envelope budget to manage business cash flow
There are several benefits to using a cash envelope system for managing your business cash flow. Here are a few to consider:
- It gives you insight into your spending. Going through the process of categorizing your cash outflows can help you understand your business expenses better. This may help you identify expenses that you can cut back on, freeing up additional cash that you might spend elsewhere.
- Categorizing your expenses can streamline tax time. Using the envelope method can make it simpler to organize business expenses when it comes time to pay taxes. With budget envelopes, you’ll already have a record of how much you’ve spent on each business expense category over time.
- It’s highly visual. If you need help visualizing cash inflow and cash outflow, envelope budgeting is a good place to start. You can gain a clear idea of how quickly money moves, where it goes, and how often.
- It helps with budgeting expenses. In the hustle and bustle of business, it’s easy to overlook an upcoming bill. And it’s unfortunate when paying that bill means going cash flow negative. But envelope budgeting makes it easier to remember those regular expenses, especially when they’re labelled and organized by their due dates.
- It helps you save for emergencies. It can be difficult to set money aside for a rainy day when you have expenses to take care of right now. But labelling an envelope for emergencies and physically putting money aside every time cash comes in could help you build up that reserve. It’s all part of making sure the next unplanned expense doesn’t disrupt your larger cash flow strategy.
- It prevents overspending. If you typically use a credit card or debit card to pay for business expenses, it can be easy to overspend accidentally. Paying with cash gives you a finite amount to spend, helping you save money and stick to your monthly budget.
How to set up a budget system using envelopes
Set up an envelope budgeting system in seven easy steps:
- Categorize your business expenses.
- Balance your budget.
- Set spending limits for each category.
- Set up your envelopes.
- Separate your funds.
- Spend from your envelopes.
- Review and monitor your spending.