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Small Business Budgeting Simplified: How to Create a Budget for Your Small Business



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you can't manage a small business

without a budget it's impossible i have

clients that make six figures or seven

figures per year in sales

but have nothing left to pay themselves

for example

this is the p l of one of my clients

they were making over a half

million dollars in sales per year but

was operating at a steep

operating loss within six months we

created a budget

held her accountable for it and flipped

that operating loss completely around

as a result they just had their highest

profit

margin ever i'm on a mission to help you

do the exact

same

hi my name is sherman with life

accounting a

full service accounting firm that helps

small businesses grow

and manage their finances today i'm

going to simplify

small business budgeting and help you

get started by the end of this episode

i promise you will have a clear

understanding of where to start with

your budget

and how to get started in the process as

a licensed cpa

and founder of multiple companies i'm

going to show you how we create

budgets for businesses we own and for

our client

if you can do me a favor by clicking the

like button below

if this video helps you in any capacity

and be sure to subscribe to our channel

so you don't miss out on other videos on

how to manage your business finances

okay so let's jump right into it i'll be

honest

it literally hurts me to my core to see

people build

very successful businesses pay their

employees and vendors

and aren't even able to pay themselves

what they deserve

even worse sometimes these businesses

are not able to pay their expenses

employees or debt payments and they

spiral out of business

as a result i'm being honest i've seen

it and i don't want another business to

suffer like this again

look i know you're probably like

budgeting accounting

oh no not this stuff again i get it

i've heard it all from hey sherman i

just want to run my business

and do what i love to do not create a

small business budget and i've heard

hey sherman i just look at the money in

my bank account it grows every month so

i don't need a budget all right

this eventually turns into sherman wait

a

minute i have to pay what in taxes are

you

kidding me dude i don't have that type

of money right now

you suck i have to find another

accountant what are these

self-employment taxes anyway dude

what are you doing to my tax return or

hey sherman dude

i'm bleeding money here man i'm making

money

but it's not in my bank account anymore

it was at first

but as we've grown i just can't keep up

with it it's flown out of control

what can i do if you're following my

drift here you can see how

easy it is to ignore your accounting

until things get

bad really bad my goal today is to

prevent you

from dealing with headaches like this in

the future they aren't fun

it's very stressful and to be honest

it's deadly

a small business budget is the most

fundamental part

of managing your business finances

correctly you need to set a budget

track it and measure it against your

actual situation and figure out

what went right or wrong you should be

looking at this

every single month with all that said

let's break down small business

budgeting to its roots

and get you squared away to work on your

own budget

okay so what is a budget put simply a

budget

is a financial plan to utilize the

resources

derived from sales the word sales

is very important here because all

budgets typically start

with a sales projection then using your

sales projection

you can determine what expenses are

required

to operate your business successfully

ideally

you can set limits for various expenses

that you have

so you can ensure that your business is

profitable at the end of the day

so that's what a budget is but why are

budgets

important for small businesses there's a

few reasons reason number one

a budget guarantees your profitability

if you

set a budget and follow it there's no

way that your business will not be

profitable

you should budget in your desired profit

margin and if everything goes according

to plan

you'll be running a profitable business

reason number two

a budget prevents the mismanagement of

incoming funds

in your business a budget forces you to

prioritize the expenses that you take on

for example with our marketing agency

life marketing we wanted to grow

very quickly so by nature we wanted to

spend

heavily into advertising and marketing

and inherently

we wanted to do all the marketing in the

world facebook ads

you bet let's spend three thousand

dollars a month google ads

you better we need to spend about five

thousand dollars a month there we

have to outspend our competitors seo i

need that okay let's let's spend 2500 a

month outbound sales teams yeah let's

get some people on the ground how much

does that cost 10 000

okay let's spend it we have to right i

could go on and on

on this train of thought luckily we had

a budget in place

and agreed to not exceed it for any

reason at all

like literally if our budget could talk

she'd say wait wait

wait a minute now you can't afford all

of this

our budget forced us to pick only a few

marketing opportunities that we believed

would yield the highest return and if

and when those things didn't pan

out we could swap it with other things

on our list that we wanted to try

now let's move on reason number three a

budget

creates a plan for every dollar in your

business

it's so easy to log into your bank

account see that you have some money

there

and then start spending it but it's not

sustainable and as your business grows

you can spend yourself out of business

or

not be able to pay your taxes later then

you'd have to deal with the irs

and risk your business being shut down

as dave ramsey says

every dollar should have a destination

in your business

a good budget will assign value to each

destination in your business

which ultimately you have control over

for example

let's say you plan to make 100 000 in

sales this year a good budget will take

that sales number and say

all right we'll spend 10 percent on

marketing 40

on employee salaries 10 on rent

and 10 percent on tools and software

we're going to use

then we'll shoot for a 30 profit margin

after these expenses whether you make

70 000 or 150 000

your budget will spit out what you can

do at that time

and remain profitable all right by now

you should know what a budget is

and why it's important now let's talk

about how you can start building your

budget

without all the complicated templates

and spreadsheets online

here are the simple steps you need to

take to start building your budget

step number one determine your business

goals

the very first step in determining your

budget

is to first determine your business

goals are you looking to increase

sales if so by how much what expenses

will be necessary for you to accomplish

that increase in sales or maybe you're

looking to improve your product or

service

what improvements will you make what

impact

will it have and how much will it cost

even wilder you might even want to buy a

business

what's the revenue of that business how

much are you willing to pay

to acquire that business your business

goals should be

top of mind when creating your budget

knowing this will help you determine

how much to allocate to certain expenses

okay

step number two forecast your sales

all budgets start with a sales forecast

and don't worry you don't have to whip

out a complicated spreadsheet for this

now i'll admit there are some simple

ways to do this

and some more sophisticated ways but for

you i'm going to give you the most

simplest way to get started with this if

you're starting with nothing

you'll probably have to guesstimate your

sales projection based off of

what is coming in your industry or if

you know

the marketing channels you plan to

invest in and the correlated kpis

and associated returns you can

potentially project this

based off of those kpis for more on this

check out my video on small business

kpis

if you're already in business then this

process becomes very simple

a simple and conservative way to project

your sales

is to look at your sales numbers from

prior years

and compute the growth rate you'll want

to know how much

on average you're growing from year to

year

once you know this you can apply that

same growth percentage

to the sales you made last year to

arrive at your annual

sales projection for this year step

number three allocate a percentage

to each of your expenses once you have

your projected sales

you can start assigning a destination

for those funds

think of the major expense categories in

your business

like accounting advertising technology

employee salaries and so on then assign

a reasonable allocation to them

based on what you expect to spend for

example let's say you projected 1.3

million dollars in sales you can then

break that down into expenses that you

expect to have

you can also find out the average

expense categories

and profit margins by looking in your

industry specifically

to help you with this now you will

likely have to pay for this type of

information

or you can go to a firm like us that can

help you find that information

anyways the biggest thing here is to

carefully consider

all expense categories in your business

and assign a reasonable allocation

percentage

to it also big tip be sure to account

for your own

salary in your budget yes your salary

should be accounted for in the employee

salary section

not in profit this is especially

important for new businesses

i made the mistake of not budgeting my

own salary in my first company

and thought we were so profitable later

i had to hire

managers and executives to replace my

work in the company

and it was challenging because i never

budgeted the actual work that i was

performing

in my own company by budgeting your own

salary

you can plan to replace yourself in the

event you need to work on something else

in your business or maybe you just want

the business to run

on its own without you regardless budget

it in

step number four convert percentages

into dollar amount the final step here

is to apply your projected sales to the

expense percentages

so you can see the actual dollar amount

of your budget

simply multiply your projected sales by

your expense

percentages now since you did this based

on your annual

sales and not monthly you can later

convert this into

monthly budgets by simply dividing all

the amounts

by 12. and that's it you will have your

budget and can

hold yourself accountable to that budget

you don't need a fancy

template to do this you can do

everything i just mentioned

by using basic multiplication and

division

now let's summarize this video today we

started off by defining

what is a budget remember a budget is

simply a financial plan

to utilize the resources derived from

sales

then we talked about the importance of

budgeting

first and foremost not having it will

lead to issues in your business

or with the irs if you're managing your

business finances

incorrectly that aside a budget also

helps you maintain profitability

it prevents the mismanagement of funds

and overspending and it assigns a place

for every single dollar that comes into

your business that's it for today folks

i

truly hope you enjoyed the material in

this video if you did

please hit the like button for me it'll

help me out a ton

and don't forget to subscribe to our

channel so you don't miss out on future

content to help your business grow

talk to you soon