4 Steps To Start Building Your Budget

For the past three years, my family has rented a campervan for a weeklong adventure. Each year we have gone to different parts of the Pacific Northwest and each year we do new things and make new memories. It is a highlight of the year. And during those trips, we always think about how great it would be to have our own campervan so we didn’t have to limit our adventures to one week a year or in the pacific northwest. Then we do the research on how much a campervan would cost. We could rent that van many times, and go over on the mileage by a lot, without coming close to the annual costs associated with owning and maintaining our own campervan.

 I admit, our family is not the best at keeping to a strict budget. We eat out a few too many times each month, spoil our dogs with chew toys, and buy new gadgets for around the house.  But we have a budget and know what we can and cannot do within the constraints of our monthly income. We know where we can tighten our belts if we need to and when and where we have more wiggle room. Each month we do a quick analysis on where we are spending so we can identify categories where spend is getting too high. A couple times a year we sit down and review the overall picture of our budget and where we stay on track and what is creeping up. The category analysis and big picture review allows us to understand our current expense situation, and both make commitments on where to stay tight and where we can be more relaxed.

As a small business owner, it is important to have a budget to understand where you are spending your money and ensure you will achieve a profit for the year. I created a budget for the business based on what I knew to be true and where I anticipated expenses growing as I entered 2022. The beauty of a small business is the business owner is close to all functions and can review, tweak, and agree with the plan without extensive back and forth. As each month’s books get closed, I monitor if my spend is aligning with what I budgeted. I have a mechanism for monitoring if I am on track to hit my profit goals and can see what changes in expenses will do to my bottom line (which I addressed in my previous post on the benefit of a budget planning tool).

As we enter fourth quarter and our attention turns to making the next year better than the last, it is time to think about your budget.

Not sure where to start? Here are four steps to help you pull together a budget for the new year (or whenever you want to pull one together. This isn’t exclusive to Q4/January).

1.       Download your expenses from your financial software. Pull down the previous 12 months so you can see what expenses occur in each month. What you spent over the past year is a good starting point for what you will spend in the next twelve months. Save the spreadsheet and adjust the date for the next year. This is now your draft budget.

2.       Review your expenses for recurring and consistent expenses. Whether it is monthly or annual payments on software licenses, rent or your bookkeeper, if you know it is going to happen each month, quarter, or year, make that the first part of your budget. Highlight those so you can see how much of those recurring expenses happen each month.

3.       Pull out your payroll expenses – compensation, benefits, payroll taxes and evaluate how much those are going to change in the coming year. Are you planning to give everyone raises? If so, calculate that increase and add it to the payroll expense section. Are you planning to add team members throughout the year? Include their compensation expenses in the months you anticipate the new team member being on board in the coming year.

4.       Evaluate your variable expenses to determine where things are inconsistent or potentially more within your control. Map out how where expenses will land throughout the year such as when key conferences are happening or the lead up to a big event your business is holding. Identify other expenses that may not have happened this year but will next such as additional marketing expenses for a new product launch or website or higher than normal legal expenses as you expand into a new geography.

Walking through these four steps you should now have a spreadsheet that charts out what you are budgeting to spend in the coming year. With this, you can analyze where you want to tighten your spending or identify where you want to invest to strengthen your business. Having all the details pulled together will give you insights into what is possible based on your target revenue and profit goals.

Still feeling overwhelmed with building a budget? Let’s talk.