Small Business Budgeting Simplified_ How to Create a Budget for Your Small Business - LYFE Accounting

Introduction

SYou 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 PNL 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. Thing. 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 clients. 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 cells. The word cells is very important here because all budgets typically start with a sales projection. Then using your sales projection you can determine what expenses are require 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 $3,000 a month. Google ads. You better. We need to spend about $5,000 a month there. We have to outspend our competitors. Seo, I need that. Okay, let's let's spend $2,500 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 write. 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 values 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% on marketing, 40% on employee salaries, 10% on rent, and 10% 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 was 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 common 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 yourselves 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 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. Anyway, 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, budgeted in step number four convert percentages into dollar amounts. 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 cells. 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.