Entrepreneurship can be a slog, especially in the beginning. Most small businesses don’t see an immediate profit. It can take years, especially if you don’t have a strong budget.
Think of a business budget like a roadmap: Your budget shows where you’re at, how far you are from your goals, and whether you’ll have enough gas to get there.
With that said, budgeting isn’t as simple as drawing a line to your destination and filling up on revenue when your tank runs low. Here’s how to draft a budget that can go the distance for your business:
1. Know Your Business’s Risks
To create a winning budget, you need to know your industry and how much it costs to run your specific business. Peer mentorship is the best way to learn. Speak with fellow entrepreneurs and small business owners to learn how they divide their revenue.
Ask them about fixed costs and variable expenses. The fixed costs, such as rent and raw materials, will stay the same from month to month. These are the easy things to budget for.
Then, think through the fluctuations you should expect. Chances are that your industry sees growth at different times throughout the year. For example, if you’re in hospitality, you might see a spike during the summer. Make sure your budget leaves ample wiggle room for the lean months.
2. Separate Your Finances
One of the biggest mistakes new entrepreneurs make is mixing their business and personal finances. Doing so can create a real mess around tax time.
Your business isn’t a hobby, so don’t treat it like one. You need to know exactly how much money your business makes and requires.
Consider paying yourself a fixed salary to create a clean line between your business and personal accounts. To keep business and personal spending separate, maintain different credit or debit cards. Keep your receipts in separate folders.
3. Maintain All Your Records
Regardless of how small your business is, you need to keep financial records. If you’re ever audited, you’ll need to provide a paper trail.
Keeping good records can also make budgeting and product strategy easier. Instead of having to guess, you’ll always know in which categories you overspent or underspent. You’ll know which of your products or services are selling, enabling you to invest more in those and less in the losers.
4. Limit Advertising
In the beginning, marketing shouldn’t make up a significant share of your budget. Before you have a product to sell, there’s no reason to spend money to attract customers.
Once you have a product, keep marketing costs to a minimum. You can use free and low-cost channels — including social media, email advertising, and digital marketing — to get the word out every bit as well as you can with traditional advertising.
Remember, too, that you don’t need to be visible on every platform. Business software probably won’t sell very well on Twitter. LinkedIn isn’t the right space for consumer products.
5. Think Through Supply Costs
Aside from labor costs, your biggest expense category is likely supplies. Do your research on different suppliers, and don’t jump at the first offer.
Reach out to multiple suppliers for quotes, or join a group purchasing organization. GPOs let small companies bundle their buying power to secure discounts normally reserved for bulk orders. Think of it like a Costco for companies.
6. Start Saving Now
You never know when an emergency will strike. That’s why it’s a good idea to put aside money from the start. If your company goes through a rough patch, you’ll have a cushion.
The easiest way to start saving? Round up your costs to keep your company “living below its means.” Otherwise, put 5% of your monthly revenue in a high-yield savings account.
Why not use CDs? Although they typically offer higher interest rates, they come with early withdrawal penalties. In the early days, you need liquid capital.
7. Plan Ahead on Taxes
It’s tempting to forget about taxes when you’re starting a business. As with your savings, start setting aside money immediately.
At the very least, you’ll have to pay self-employment tax. If you sell physical products, you’ll owe taxes on each sale. And if you hire employees, you’ll need to chip in for their taxes as well.
You may not need to pay quarterly taxes in your first year, depending on your revenue and structure. Maximize your tax deductions, but don’t claim things you shouldn’t.
8. Go Virtual
Physical offices are expensive. Between rent and utilities, a small space might run you thousands of dollars per month. Unless you need a storefront or have employees, work from a home office for as long as you can.
Virtual offices also come with other perks. You’ll appear more cutting-edge to clients, master the latest communication technologies, and save time on office management. That means more time you can spend serving your customers.
9. Explore Different Types of Workers
Full-time employees may be the gold standard, but they’re also expensive. Working with contractors can save you up to 30% compared to hiring traditional employees.
You can find a freelancer for just about any business need imaginable, from lawncare to web design to writing. You won’t have to worry about training, benefits, or payroll. And if you like their services, you can work with them over the long haul while saving your company money.
10. Audit Your Budget Quarterly
It’s incredibly important to stay on budget. Your small business is fragile, which means you need to be careful with your money.
At least once a quarter, sit down to review your income and expenses. Are your supply costs in line with your projections? Is your revenue where it should be? If not, re-evaluate your budget. Cut costs, or find ways to bring in more income.
By a long shot, budgeting isn’t the best part of entrepreneurship. It is, however, a necessary one. Do it well, and you’ll have more time and money to enjoy all the other great parts of owning your own business.