Starting a new business could be tedious. Trying to grow a side hustle, or running a seasonal business. On top of the operational and customer issues that inevitably eat up your time, you also need to know where you stand financially.
Despite how good you may be at running your business, you might not be as interested in putting together a budget — but getting your numbers right may very well make or break your business. And don’t forget the tax treatment for your small business, various deductions, and income classifications may also be changing every year?
Luckily, you aren’t in this alone. You should certainly use any budget hacks or apps that fit you and your business to help automate and streamline this process, but in order to do that, you need to start somewhere.
As always, be sure to consult a financial professional to address specific questions about your business. Let’s take a look at some of the budgeting fundamentals that every entrepreneur should know:
1. Figure out your business costs.
It doesn’t matter if you’re running an online business, a specialized carpentry shop, or a few side hustles — every business costs money. When you’re just starting out, it’s especially important to identify and track the different types of costs associated with your business and to break those out from your personal expenses.
After you have your costs separated in total, be sure to know the difference between your business’s fixed costs (rent, utilities, etc.), and your variable costs (like marketing).
2. Separate your finances.
This may not sound like a budgeting tip, but hear me out. Separating out your business and personal costs will help you in at least three ways.
First, you will be better able to identify if your business is actually making money or not. Second, you have a better handle on which items you will be able to deduct as a business expense.
Last but not least, you will know whether your business is classified as a business or a hobby if the KWIRS comes knocking.
3. Set aside money for taxes.
Nobody really likes paying taxes, and I’ve seen a lot of entrepreneurs get tripped up because they didn’t budget and set aside money for taxes. Depending on the state(s) you do business in and where your business is located, the tax rates will be different — but a good rule of thumb is to set aside at least 30 percent of your income (revenues minus costs) for tax payments.
Be sure to talk to your tax professional for specifics, including whether or not your business has to file quarterly taxes. By at least setting aside some money, you’ll already be ahead of the game.
4. Build an income forecast.
To get the most out for your time and energy invested in the budgeting process, you should build a plan for how your business will perform in the future. You’ll never get it 100 percent correct, but you can do a few things to help put together a good starting point.
Items you should track include:
- Changes you’re planning to make to your products and services.
- New lines of business.
- Your price increases to customers.
- Increases in rent.
- Inflation forecasts.
- Any planned hiring.
- Changes to existing contracts and customer relationships.
5. Don’t set it and forget it.
As tempting as it may be, especially after spending all that time and energy building your budget, you shouldn’t treat this process as a one-off thing or an annual event. Budgeting and tracking your business costs, revenues, and income-related items should be done on a continuous basis.
This is where all those budget hacks and apps can really help you. Linking your business management software to your finance and budgeting platforms can give you an accurate and almost real-time view of how your business is performing.
Budgeting can be a time consuming and challenging process, especially at first, but there are some key fundamentals that can help you get this ball rolling. The more information you have on your business finances, the more successful your business will be.