Starting a small business is exciting, but pouring your heart and soul into a new venture needs to include a financial plan on how you’ll sustain and eventually grow it. It’s essential that you understand how to create a budget for your small business. Otherwise, you may find that within a few months, your funds are draining with no plan on how to keep everything afloat.
Though it’s not one of the sexier aspects of running a business, creating a budget is crucial to ensure ample cash flow, determine how much you need to earn, and create a financial cushion in case of unforeseen circumstances. It’s also useful if you want to take out a small business loan, deciding on how you plan on growing your business (including taking on investors).
To help you get started, we’ve outlined these 7 steps to take so you can create an effective budget template:
1. Determine Your Budget Goal
Your budget goal is the maximum amount you’re willing to spend to start your small business. Think of this number as a guidepost on how much you should spend — as you work through your expenses, this amount will help you finesse those numbers.
Your total budget should be based on the amount you’ve borrowed or from your personal savings. That being said, taking out a small business loan is a huge responsibility, so borrow how much you feel you can realistically pay back.
2. Determine Initial Business Expenses
These expenses are one-time costs to get your small business off and running. To start, write down all the possible items you’ll need — get as detailed as possible.
Here are some ideas to get you started:
- Business license
- Equipment (such as computers, tech and other specialized items)
- Attorney fees
- Website hosting and design
- Inventory (for product-based businesses)
- Office supplies
Once you’ve listed everything out, determine whether they’re a need, a nice to have, or ones that you can put off later. For instance, getting a business license and website is crucial to start your small business, whereas a fancy new laptop isn’t. You want to hire a full-time assistant, but you’re not sure whether that’ll be necessary for another 6 to 12 months.
The idea is to narrow this list down to your essential items and a few that are nice to have. Estimate these costs and you have your estimated initial expenses.
3. Determine Monthly Operating Expenses
You’ll need cash to pay for your monthly or recurring expenses to keep your business afloat. Again, the type of expenses you’ll need will depend on the nature of your business. Start by brainstorming a list and narrowing it down to the essentials.
Here’s a list of common business expenses:
- Rent (office or co-working space)
- Subscriptions to software or website hosting
- Goods or raw materials (for product based businesses)
Don’t forget to estimate an amount you want to compensate for your time — think of this as your monthly salary. After all, you’re in the business of earning money, so your budget should reflect that.
4. Calculate How Long You’ll Go Without Income
Creating an estimate of how long your business will go without any income (called losses) is important because you won’t generate any initially. Since you are starting a new business, you need time to build traction and attract customers. Budgeting for these losses ensures you’ll be able to keep going.
Now that you’ve estimated your monthly recurring expenses, multiply this monthly figure by the number of months you’ll expect not to generate any income. This number will help you figure out the bare minimum you’ll need in your budget, plus what you need to earn to break even.
5. Account for Taxes
As a business owner, you’re not responsible for paying for your own taxes. Depending on your business structure, you’ll either have to pay quarterly taxes (such as if you’re a sole proprietor or single-member LLC), each month for payroll taxes (for entities such as S-Corps), and other relevant fees. Budgeting what you may owe the IRS is important, as you don’t want to be caught off guard when it comes time to file and pay your taxes.
The exact amount will depend on your business and even state regulations, so it’s a good idea to check with an accounting professional to estimate a percentage of how much you should set aside. As a general rule of thumb, aim for 30% or more of what you think you’ll earn — having a bit of wiggle room is better than scrambling at the last minute to scrounge up money for payments.
6. Create a Buffer
Creating a buffer tends to be an overlooked part of any small business budget. If you don’t account this into your estimates, you could find yourself in hot water if you don’t have enough to cover unexpected or last-minute expenses. In other words, it’s there in case you need it, not as money you can spend regularly.
To create a buffer, add 10% to 15% to both your estimated startup and monthly expenses. All this together with your startup and monthly expenses and you have your initial overall budget estimate.
7. Review and Balance Budget
You want to make sure that your budget goal is on par with your estimated budget. If that’s the case, great! Otherwise, you’ll need to balance your budget so that it is realistic.
To start, look at your startup expenses and see where you may be able to cut back. In most cases, you can modify your non-essential expenses, whether that’s finding a more inexpensive solution or eliminating it altogether.
Then move onto your monthly expenses to see what you can reduce or eliminate, at least until you break even. For instance, you want to sell a certain line of products but storage costs are high. Instead, you can sell something similar that’s smaller, meaning you can rent a smaller warehouse space.
It might also be necessary to scrutinize your essential costs. If you’re unsure where to start, ask other small business owners or seek the help of a mentor to help you figure it out. As a last resort, consider lowering your compensation amount — only do this if you have enough personal savings.
Once your budget is the same as your estimate, use this as your initial budget moving forward. This living, breathing document is what will help you as you get started and keep you on track to make sure you have the best chance of earning a healthy profit.
Check Out These Small Business Budget Templates
- Capterra small business budget template (Excel)
- PDFConverter.com’s best budgets — there’s 15 to choose from
- Microsoft Office templates
- Google Sheets annual business budget template
Once you’ve plugged in all your numbers, don’t forget to review your budget, especially as you’re looking to grow. You want your business to be around for a long time, and an effective budget will help you with just that.