How do you build your budget? Do you even have a budget?
I'll be perfectly honest with you. When I first started out in business I sort of did, but not really. I'd write something out once in a while as sort of a part of a business plan, but never really looked back after I wrote it. As the course of the year would go on, things would change. New ideas would pop in my head, and I'd spend money. I was frugal enough. I've always been good at finding ways to do more with less. But in the end, when it came time to prep the financials, there was never profit.
What was I missing?
I was missing a framework to keep me on track.
Enter, the envelope system. Basically.
This is that same system that your grandparents probably used where when payday comes, a little goes in the envelope marked mortgage, a little goes in the envelope marked groceries, and so on.
I started using that same system for my business, although not with envelopes stuffed with cash. I'd probably just lose those in the pile of papers cluttering my desk.
I like to use an app called YNAB (You Need a Budget). It's built for personal finance, but it works perfectly for your small business too. You can link you bank accounts and your credit cards, so capturing the transactions is a breeze.
You can also just do this by setting up multiple bank accounts. If you go the bank account route, just make sure that there aren't fees attached to having those accounts. You will want one account for income, and you will want an account for each spending or saving category you identify.
If you are using YNAB like me, the income will just show up as unbudgeted, and you assign it to each category until it is down to zero. Whether you are using YNAB or separate bank accounts, it's a good idea to allocate our income into the categories about once every two weeks or twice a month.
For your budget buckets, you will have to think through your business and decide what makes sense for you. If you own a coffee shop for example, you will probably want a bucket for your supplies like coffee beans, milk, food items, etc., a bucket for rent, a bucket for labor, and a bucket for other miscellaneous operating expenses.
It's also a good idea to set up a bucket to put some savings away. It's a good idea to save up three months worth of operating expenses to have on hand in case of an emergency. It should also be noted that everything that goes into this bucket will really turn out to be your profit as long as you don't spend beyond what you have in your other buckets.
To get started, go through your financials and see about how much you are spending in each of those categories and determine what percentage of your revenue that makes up. That will be your starting point, so every dollar that comes in will get divided up accordingly.
From there, you are going to want to improve. Try putting a little more away in that savings bucket each month. Don't be too aggressive and try to shift too much at once. You are trying to build healthy financial habits, so just move by a percentage point or two as you find ways to cut your costs. Doing this will drive you to be more efficient, and the financial health of your business will grow.
I saw the impacts of this system from the very first time I started using it with my business. I started simple by just setting 5% out of every dollar aside and ran the business with the rest. The mental shift was amazing. I became more focused on investing in what my business does best, and quit wasting on areas that weren't needed. And most importantly, the cash grew.
If you're interested in checking out YNAB, follow this link to get a free month.