I’m not the first to assert that “budget is not a bad word.” Although it’s commonplace to see budgeting in a negative light, a subset of the population recognizes how a budget can highlight priorities, serve as a communication tool, and provide structure in a chaotic world.
A budget doesn’t have to be restrictive, but rather, permission to spend! In setting aside a certain dollar amount by category, you are giving yourself the freedom to spend funds on certain activities or assets. The key is to set dollar amounts that align with your priorities and reflect reality.
In a business setting, some common financial priorities include:
- Paying yourself a salary (or increasing your take-home pay)
- Hiring a new employee, giving your employees a raise, or offering employee health benefits
- Buying a new piece of equipment
- Leasing or purchasing property to expand operations
On a personal level, your financial priorities might include:
- Saving for retirement, a down payment on a home and/or your child’s education
- Buying new furniture or a reliable vehicle
- Taking a much needed vacation
In establishing priorities, it’s also helpful to determine if they are ongoing or onetime expenses.
Action Step: List out your financial priorities or goals, for both your business and your personal life.
For future income and expense projections, be as grounded (or conservative) as possible. Base your projections on actual contracts, bids, and/or estimates provided by customers or vendors.
Alternatively, you can estimate your financial future by clearly understanding where your money has been coming from or going. Again, for best results, differentiate between onetime vs. ongoing.
Action Step: Review your Profit & Loss Statements, credit card, and bank statements. Group income sources and expenses into major categories.
Add up all your annual sources of income. Next, add up all your annual expenses. Which total is larger?
If your income is greater than your expenses, is the difference large enough to meet your business and/or personal financial goals? If not (or if your expenses are greater than your income), take a hard look at your expense categories.
Are your expenses discretionary (i.e. relatively easy to reduce by monitoring)? Discretionary expenses typically include eating out, entertainment, and travel expenses. Or, are the expenses essentially fixed – such as your monthly lease or mortgage?
Tip: while it’s low hanging fruit to cut or reduce discretionary spending, the big bucks are typically realized when people rethink their “fixed” expenses. This might mean finding a smaller office space, paying employees on an hourly basis verses a salary, or hunting for a less expensive internet/communications plan.
As suggested at the beginning of this article, developing a budget means you are proactively thinking about your money choices. You are consciously setting priorities. Then, throughout the year, “actual” income and expenses can be tracked against the budget (this is called a “budget variance” report). When shared with others, a budget variance report becomes an excellent communication tool - keeping everyone informed, accountable, and on the same page.
Action Step: If you need help establishing a budget for your business, contact the Small Business Development Center at firstname.lastname@example.org or by calling (360) 778-1762. A SBDC business advisor can help you better understand your past financial performance and aid you in planning for your financial future!
Authored by: Sherri Daymon