10 Quick Tips for Budgeting Your Business Expenses
Budgets are an invaluable tool when it comes to managing expenses.
By quantifying your business plans for the upcoming year, your budget can assist with financial decisions and provide a roadmap to take your business where you want it to go.
Have you created your budget for 2020? Here are 10 tips to help you get started.
1. Include the right people
When budgeting your expenses, it’s important to include anyone who spends on behalf of your business. By including the employee developing marketing initiatives, the employee responsible for ordering supplies, etc., you'll know how much will be needed and when it will be spent.
2. Question everything
Once you know the costs and how often they occur, question them. There are usually only two reasons to spend money in your business: to acquire new clients or to retain current clients. If the expense in question does not fulfil either one of those objectives, ask yourself why you're spending money on it.
3. Know the difference between “need to have” and “nice to have”
Identify which expenses are absolutely necessary to your business and which ones are the “it would be nice if…” kind.
Always budget the “need to have expenses” first. This budget becomes your baseline or low budget. Only when those expenses are covered should you add in the “nice to have” expenses. This will provide you with an upper range of your expenses, or high budget.
Throughout the year, and as you assess your business’ performance, you can use your baseline budget, high budget, or a combination of both.
4. Beware of the next “shiny new thing”
Budgets are a tool to help keep you on course with how to spend to reach your goals. It may be tempting to dip into your funds to incorporate the "next big thing" into your business, but your budget is important to help keep you afloat. Beware of distractions that may take you off course.
5. Allow for annual increases
Whenever possible, account for annual increases. This might include a cost of living adjustment for payroll or an increase for utilities.
6. Communicate with vendors
Get in touch with your vendors at the beginning of the year to review costs of goods. It's important to ask them if they're anticipating any sort of price changes. This will prevent you from being blindsided during the year with unexpected increases.
7. Be conservative and overestimate
Always overestimate expenses to be safe. Allowing for a buffer is never a bad idea—especially when those inevitable unexpected expenses come up.
Let's say you own an indoor cycling studio that houses 50 indoor bikes that are constantly booked. You really can't anticipate how many times they need to be repaired or replaced. By allowing this buffer, you can keep your bikes in working order, your schedule full, and your customers happy.
8. Understand your profit margin
Know how much you're spending to produce revenue. These direct costs are variable and will likely increase if your sales increase and decrease if your sales fall.
By knowing these expenses and your profit margin, or the difference between your revenue and your expenses, you'll see how much is needed to cover expenses when you forecast future sales.
9. Know your overhead
Your overhead costs consist of your operating expenses. These are non-revenue producing expenses that are necessary for your business. They're often fixed costs and paid monthly.
Some examples include:
- Office supplies
Ready to learn how to create a marketing plan and budget for your business? Download our guide.
10. Know your break-even point
Your break-even point is the moment you've sold enough products and services to cover your expenses. Understanding your direct costs and operating expenses, month-to-month, will help answer the question “how much do we need to sell?”
Once your budget is created, it should be reviewed often, compared to actual spending and updated to account for any changes in the goals or outlook for the business. Your budget is an opportunity to design your financial destiny and map out a course that takes you from where you are now to where you want to be.