How to Budget for Your Small Business

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It’s no surprise that starting a business requires a decent chunk of money, but expenses don’t end once you’re up and running. As a small business owner, you’ll want to create and maintain a reliable budget to keep your finances in check.

According to Annie Scranton, owner of Pace Public Relations, businesses of all sizes experience financial fluctuation, so it’s important to plan ahead.

“If you don’t budget and save accordingly, you’ll be in a bad way [if or when] your company takes a downturn or even has an off month,” she said. “You have to account for slow payments, and budgeting can help alleviate the financial burden you may feel while waiting for a check to arrive.”

Before embarking on your journey in the business world, create a sustainable yet realistic budget for your company. In honor of Financial Literacy Month, we outlined expert tips for small business owners looking to keep their finances in order. [Read related story: Smart Strategies to Stretch Your Startup Dollars]

Editor’s Note: Looking for information on accounting software for your business? Use the questionnaire below, and our vendor partners will contact you to provide you with the information and quotes you need:

1. Involve your employees.

Just because you’re the business owner doesn’t mean all the pressure lies on you. Your budget involves everyone in your company, so each worker should be aware of its principals and add any insight or ideas they deem necessary.

“A proper budget is far too important and there are too many variables for this responsibility to fall on one person’s shoulders,” said Nate Masterson, marketing manager for Maple Holistics. “An ideal budget should undergo intense scrutiny by a team of employees with a diverse set of skills to effectively manage a small business budget. By relying on a coordinated team, you can approach your budget from different perspectives to ultimately expect the unexpected and plan accordingly.”

Additionally, employees should know about any changes you make that might affect them or your company so they understand what is expected of them going forward.

“Keep employees updated on your short- and long-term financial goals, as well as what they can do to help reach them,” said Kala Gibson, SVP and head of business banking at Fifth Third Bank. “By connecting individual goals to the business’s broader aims, you’ll keep everyone working toward the same end.”

2. Don’t underpay yourself.

Many business owners are tempted to save every penny they earn for their budget, especially in the beginning. And while it’s important to have backup finances, your budget should allow plenty of room for you to be paid.

“With so many moving parts, it is easy for small business owners to forget that they have to be paid as well,” said Doug Keller, financial planner at Peak Personal Finance. “Some people feel guilty paying themselves when it seems the money could be allocated elsewhere … but at the end of the day, the owner is still just an employee. You need to compensate yourself as such and find other methods for paying off other expenses.”

3. Define and understand your risks.

Every business venture has risk involved, and each risk could financially impact your company. Paul Cho, CEO of Align Income Share Funding, said that small business owners need to consider their long- and short-term risks to accurately plan for their financial future.

“How will changes in minimum wage or health care requirements impact your workforce?” Cho said. “Do you operate in a geography at high risk of a natural disaster? Do you rely heavily on seasonal workers? Understanding the potential risks facing you on a short- and long-term basis is important for all small businesses. Once you’ve mapped out the threats to productivity, a clearer picture can be built around emergency planning, insurance needs, etc.”

Scranton suggests listing your guaranteed income and expenses per month to understand your risks.

“This is a great baseline to figure out how liquid your company really is,” she said. “If you’re making money, then you’re able to at least set aside a portion for savings, or to go toward enhancing the company through new hires, expansion, etc.”

4. Overestimate expenses.

If your business operates on a project-to-project basis, you know that every client is different and no two projects will turn out exactly the same. Often, you can’t predict when something will go over budget.

“So much of business is planning and reacting to the unexpected,” said Keller. “For small business owners, failing to anticipate an expense or its magnitude could prove disastrous and cripple the organization before it has had time to grow. To counteract that, it is important that business owners overestimate expenses and shield themselves. Doing so is a survival tactic that will allow owners to hedge against risk or failure.”

“Every project seems to have [an extra] cost that was never anticipated,” added James Ontra, CEO of presentation management company Shufflrr.

For this reason, Ontra advised budgeting slightly above your anticipated line-item costs, no matter what, so that if you do go over, you’ll be prepared.

5. Pay attention to your sales cycle.

Many businesses go through busy and slow periods over the course of the year. If your company has an “off season,” you’ll need to account for your expenses during that time. Cho also suggested using your slower periods to plan for your next sales boom.

“There is much to be learned from your sales cycles,” he said. “Use your downtime to ramp up your marketing efforts while preventing profit generation from screeching to a halt. To keep your company thriving and the revenue coming in, you will have to identify how to market to your customers in new and creative ways.”

Scranton said if you know your business has slower times, you should have extra money in the bank during those months.

“It’s best to try to keep costs down even more in the off seasons and to have extra money saved in case the money coming in isn’t as much as you had hoped,” she said.

6. Remember that time is money, too.

One of the biggest mistakes small businesses make is forgetting to incorporate their time into a budget plan. Ontra reminded business owners that time is money, especially when working with people who are paid for their time.

“Timing underestimation directly increases costs,” Ontra said. “Not only do you start to lose time to the delivery schedule, your team also loses momentum as their collective thought shifts focus to another project.”

Ontra recommended treating your time like your money, and set external deadlines later than when you think the project will realistically be done.

“If you believe the project will finish on Friday, promise delivery on Monday,” he said. “So, if you finish on Friday, deliver the work early and become a star. If for some reason time runs over, deliver on Monday, and you are still a success.”

7. Constantly revisit your budget.

Your budget will never be static or consistent — it will change and evolve with your business, and you’ll need to adjust it based on your growth and profit patterns.

“For small business owners, it takes time to learn the cyclical nature of the business as seasonal trends naturally affect budget and organizational efficiency,” said Keller. “Especially early on, the budget may undergo many changes to adjust to new or fluctuating costs. As a result, it is imperative that small business owners be mindful of this and stay on top of their budget and adjust it as needed.”

Cho suggested revising your monthly and annual budgets regularly to get a clearer, updated picture of your business finances.

“Regularly revisiting your budget will help you better control financial decisions, because you will know exactly what you can afford to spend versus how much you are projecting to make,” Cho said.

You should also consider past market trends to help prepare yourself for the year ahead. From there, you can factor in emergency funds and unexpected costs, Cho added.

Additional reporting by Nicole Fallon. Some source interviews were conducted for a previous version of this article.