Understanding the money that comes into and flows out of your business each month is one of the most important things that any business owner can do. The more you learn about your finances as an entrepreneur, the easier it is to cut down on the costs that could be preventing you from reaching your full potential.
Unfortunately, a lot of small business owners that are just getting started in the marketplace for the first time don’t know much about business expenses. They assume that they can hand the task of budgeting and cash flow management over to their accountant and ignore it completely. However, you’ll find that you accomplish a lot more if you learn the basics yourself.
Step 1: Know Where Your Income is Coming From
Probably the most important thing you’ll need to know as a business owner is where your income is coming from. Where are your repeat customers and how much do they pay you each month? How often do you bring in one-off clients or customers who can help to top up what you earn? Maybe you occasionally tap into payday loans and other sources of funding to help you to take advantage of new opportunities. Make sure that you know where all your available sources of cash are.
Some of the most common examples include product sales, loans, savings, investment income, and product sales. If you’re a service provider rather than someone who sells products, you might need to account for hourly earnings.
Step 2: Know Your Fixed and Variable Costs
Next, it’s time to figure out how much you’re going to be spending on your business on a monthly basis. These expenses are known as your fixed costs because they stay the same every month. A fixed cost might be your software subscription license, or the amount that you pay for your office on a leased contract. Once you’re done adding those expenses up, you can turn over to your variable costs – the things that change more frequently.
Variable expenses are the things that don’t have the same price every month. Usually, these purchases might change depending on what’s happening in your business at any given moment. For instance, a lot of new companies use marketing as a variable cost. When they have more money to spend, they can put it towards advertising. However, when budgets are low, marketing gets scaled back.
Step 3: Think About Your One-Time Expenses
Once you know where your income is coming from, as well as where your money is going on a regular basis, you can begin to look into your one-time expenses. One time expenses are basically the things that you need to buy once for your business, but probably won’t need to buy again – at least for quite some time. For instance, you might need to buy a computer when you’re first setting up your digital business, along with some other basic hardware, like a printer.
Additionally, some companies need to pay for things like office furniture, or even business cards that they can use to travel to and from client homes. The one-time expenses that you encounter will differ based on your company.
Step 4: Pull Everything Together
You’ll be able to pull everything together into a completed business budget. This is the document that you’ll include with your financial information for a loan business or bank when you want to get help with your capital. You can also use your budget statement to provide an insight into how you plan on staying profitable to investors who want to get involved with your business.
A lot of people use their budget statements from their businesses to discuss money-saving opportunities with accountants and financial professionals too. The more you know about where you’re earning and spending money each month, the easier it will be for financial professionals to give you advice on where you can afford to cut back.
Step 5: Create a Plan
With all of your financial information ready, start building a plan for how you’re going to keep your earnings as high as possible in the months ahead, and how you’re going to keep your expenses low. Now and again, you may need to come back to your budget and think about how you can adjust it. For instance, if you start earning more, you can ramp up your variable expenses like marketing so that you can earn more business in the long-term.