Budgeting Basics for Small Business Owners and Entrepreneurs

Budgeting Basics

What Is A Budget?

A spending plan, plain and simple. It's when a business owner projects how much income (revenue) they will earn in sales revenue during a given period (e.g., month, quarter, year) and the costs (expenses) incurred to operate the business.

The keyword is PLAN.

“If you fail to plan, you are planning to fail.” – Benjamin Franklin

A budget makes it possible to grow and manage a successful business.

TIP: Open a business bank account to keep business and personal finances separate.

Sales Revenue

Income earned after the sale of a product or service. Sales revenue is the foundation of a budget.

Sales Projection

How much income in sales revenue is the business expected to realistically earn during the budgeting period? This requires strategic thinking.

A year-at-a-glance calendar can be a useful tool to project revenue and expenses.

• Is there a time of year business is expected to be busy?

• Is there a time of year business is expected to be slow?

• Is sales revenue affected (positively or negatively) by holidays?

• What impacts sales revenue?

These are the kinds of strategic questions a business owner should consider when projecting sales revenue. If the business has been around more than a year, analyze historical data (the previous year) to project sales revenue for the current period. If the business is a start-up, use industry averages to help with the projections.

Expense Projection What costs (fixed and variable) will be incurred to operate the business. Use the sales projection to determine the costs required to operate the business. Allocate a percentage of every dollar of the annual sales revenue to an expense category. Lastly, convert the percentages into dollars and divide by 12 to turn the annual budget into a monthly budget.

TIP: Budget for the owner's salary, desired profit margin, and taxes.

Sample Expense Categories:

Final Thoughts

“A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsey

Hold yourself accountable to the budget. Review it monthly, quarterly, and yearly. Compare the budgeted income and expense numbers to actual income and expense numbers. Determine what went right or wrong to manage profitability.