As a self-employed business owner, creating a budget is one of the most important things you can do to grow your business in a healthy way. While you might assume an annual budget is the best approach to financial planning, monthly or quarterly budgets can also be useful for keeping your financial situation under control too. With these tools, you can manage revenue, expenses, profits, cash flow, and financial goals for your business, either in consultation with a professional accountant or by using financial software such as QuickBooks Online. For the self-employed, advice and tips on small business budgeting can help you make wise choices.
Include Your Whole Self-Employed Business Team in Budgeting
While you may have the final say over your small business’s finances, it’s wise to include your team as you prepare a budget. Everyone who’s accountable to the budget should get some input into your decisions — after all, they can offer unique insight. For example, if you have a warehouse, your warehouse employees can help you decide if it’s more useful to budget for a new scissor lift, or if you should invest in inventory management software. When your employees are part of your budgeting process, they feel connected to your business goals.
1. Focus on More Than Individual Line Items
All too often, changing one line item on your budget has repercussions throughout the document. If you hire more employees, for instance, their salaries aren’t the only new expense you have to budget for. You also have to increase the benefits and payroll taxes. While handling payroll online can simplify the process, so you don’t incur an increase in administrative costs, it’s important to think about the financial ramifications of any change you make to the budget.
2. Make Sure You’re Covering All Expense Categories
Your business expenses fall into one of three basic categories: fixed costs, variable costs, and one-time expenses. Fixed costs include:
- Mortgage or rent
- Salaries and benefits
- Utilities, including cellphones
- Internet expenses, including web hosting
- Licenses, certificates, other government charges, and bank fees
Variable costs are those expenses you can’t predict with absolute certainty from month to month. These typically include:
- Raw materials
- Legal and professional fees
- Fees and wages paid to contractors
- Sales commissions
- Advertising and marketing costs
- Travel, including attendance at conferences, seminars, and professional or trade events
- Office expenses, such as printing
Also, sometimes you need to make a capital outlay for important office equipment, such as computers, furniture, software, and other tech items, or manufacturing equipment. Track your expenses closely, and accurately, using QuickBooks.
3. Pay Yourself Appropriately
As a small business owner, it’s all too tempting to pour your salary back into your budget — especially when you’re trying to get a new enterprise off the ground. Some new business owners feel guilty about paying themselves, and others feel it’s more important to use that money elsewhere. Remember, though, that you’re an employee of your business as well as an owner, and you deserve an appropriate salary as much as your employees do. If you choose to sell your company down the line, your refusal to take a salary can make the business’s history seem financially troubled, even if that’s not true.
4. Pay Close Attention to Time Estimates
If you pay employees on an hourly basis, budgetary glitches can appear if you underestimate the time that certain tasks take. For example, if you assume that taking manual inventory in your storeroom is a two-day task and it takes four days, that’s going to cost you twice as much in wages. Underestimating time can affect delivery schedules and throw off your team’s momentum as they aim for unrealistic deadlines. Even though you don’t have a line item on your budget for time estimates, being realistic about the time needed to complete tasks can help you meet your budgetary goals. One helpful tip is to assign an extra cushion of time to each project (including when you give delivery estimates to clients).
5. Treat Your Budget as a Living Entity
If you expect to create a budget once a year and never refer to it again, you may be surprised. Your budget doesn’t remain static, even from one month to the next. Instead, it evolves as your business grows and with the constant ebb and flow of sales and expenses. Seasonal trends affect your budget, as does your organizational and financial efficiency. As your costs change, your budget should change as well. As a small business owner, staying on top of your budget and making regular, frequent adjustments to it is key to having a clear understanding of your company’s financial situation. Every time you visit and tweak your budget, you put yourself in a better position to make smart financial decisions in the immediate future.
6. Watch Out for Wishful Thinking
If you create a budget based on your best-case-scenario projections of sales or other income, you may be setting yourself up for disappointment. Use past results from as far back as five years combined with realistic, conservative future projections to create your budget. As you compare past budgets, look for fluctuations in certain line items, and try to account for them. Using these numbers provides a solid basis for establishing your next budget.
7. Choose the Right Tools
Having the right tools on hand lets you approach any task professionally, whether you’re baking cheesecakes for your café, shooting a video to promote your online store, or creating a budget for your small business. Sure, you can rough out a budget using a basic spreadsheet program, but professional accounting software such as QuickBooks gives you a leg up on the competition. With professional accounting and budgeting software, you can compare your current budget to previous ones, and crunching numbers to see what adjustments to make becomes a breeze.
8. Overestimate Your Expenses
Many small businesses move from one project to the next, and each one is different. If this sounds like your business, you know that predicting expenses on a project-by-project basis often involves a bit of guessing. While large companies often have a healthy financial cushion to fall back on, your small business may be more dramatically affected if you fail to anticipate and budget for expenses. To counteract that possibility, overestimate expenses, especially those flexible — and sometimes unpredictable — expenses attached to client-driven projects. Doing so builds a hedge into your budget, so you’re prepared for unanticipated expenses.
9. Adjust Your Budget to Accommodate Seasonal Ebb and Flow
Many businesses do more than half their business during the year-end shopping season. Your most profitable seasons may fall at other times of the year. If you sell school uniforms and supplies, for instance, you’re likely to be at your busiest in late summer and early fall. If you run a ski shop, winter is your high season. If you have definite sales cycles in your business, any budget that tries to treat each month equally is likely to be unrealistic in the extreme. Compare your budget-in-progress to past budgets on a month-by-month basis to get a more accurate snapshot of how your business is doing. Sock away cash in the bank to keep employees paid and the doors open during your down season, and look for ways to economize. That money you set aside when orders are rolling in can keep you from going into debt when things slow down. Your slow season is also a great time to work on ideas for product extensions and new marketing campaigns as you gear up for your busy time again.
10. Keep It Simple
If you’re a very hands-on small business owner, you may find yourself tempted to dive deep into your line items as you prepare your company’s budget. Try to resist this temptation. Instead, your budgeting is likely to be more helpful if you focus on the category level. Think about office supplies in general rather than trying to determine how many pencils you need. By keeping things simple, you make it easier to track your expenses through the month or quarter.
11. Look for Places to Cut Costs
Even if your income is fairly steady, keeping your costs down is always a smart idea. Perhaps you can find vendors whose prices are lower than you’re currently paying, or you could shift to bulk purchasing to save money. Focusing on streamlining your processes through effective implementation of time management skills could net you savings as well. Maybe you could get the same advertising bang for your bucks by shifting some of your marketing outreach to social media. Your employees also may have some great cost-cutting ideas, so consider asking for suggestions or even holding a contest with a nice prize to the person with the most cost-effective idea.
12. Keep Everyone Accountable — Starting With Yourself
A budget is only as good as your ability to stick to it. As your business grows, you end up trusting more and more people to stay within their department budgets, but real accountability starts and ends with you. If financial discipline doesn’t come easily to you, you might ask one or more of your employees to keep you accountable. Hold the line on your employees’ accountability as well, taking it seriously if anyone goes over budget. Reviewing your budget periodically with all employees who have the authority to spend money on behalf of the company can make sure you’re all on the same page.
Working with smart accounting software helps you stay ahead of the curve when it comes to budgeting. With QuickBooks Online, you can organize your business finances and stay ready for tax time. Try it free for 30 days.