10 Expert Budgeting Tips for Small Businesses
Do you run a small business?
If so, staying on top of your expenses is a critical component of long-term financial success. Few things can help you achieve those ends more than setting a budget and sticking to it.
Here are 10 business budgeting tips:
- Understand your business model
- Look at historical revenues and costs
- Develop income and cost projections
- Set budgets for your employees and key projects
- Equip your team with the right finance tools
- Look for duplicative spend items or unused vendors
- Identify your highest cost centers and negotiate with vendors
- Outsource where it makes sense
- Audit and review expenses regularly
- Practice makes perfect
1. Understand Your Business Model: Income and Expenses
Budgeting for small businesses starts with understanding your business model. According to Harvard Business Review, “A business model consists of four elements: a customer value proposition, a profit formula, key resources, and key processes.”
To develop these elements, you need to know your basic income and expenses on a monthly and annual basis. First, answer:
- How do you make money as a small business?
- How often do you receive revenue—daily, weekly, monthly, or quarterly? How much revenue is coming in?
- How predictable is the income you expect to generate every month, quarter, and year?
Once you have these, look at your monthly and annual expenses as a business owner:
- What are your key costs?
- When and how often do you pay those out?
Next, identify the key dependencies and risks your business has. If you expect a change in your cost of goods, or if your state is implementing a new minimum wage, factor these in. Anything that will impact your income or expenses should be accounted for, so you’re prepared for best- and worst-case scenarios.
2. Look at Historical Revenues and Costs
To understand your current financial situation, it helps to look over historical revenues and expenses. How have they changed? What caused any shifts? In which months did expenses and revenues grow or retract?
Use the past 12 or 24 months as data points to appropriately budget each month.
A regular audit of your historic revenues and costs is an excellent tool that can point to where you can cut business expenses. They make it easier to see where waste may be occurring or where there are opportunities to increase revenue.
3. Develop Income and Cost Projections—Include Worst-Case Scenarios
When budget planning for the next month, quarter, or year, it’s important to consider worst-case scenarios, alongside your standard projections.
A rule of thumb when developing income and cost projections is to always assume you'll earn less and that your expenses will cost more. Inc. Magazine reports, "It's crucial to factor in variables such as fuel, healthcare, and raw material costs by creating ‘what if’ scenarios and having enough money set aside to handle when probabilities become realities."
Machines break. Human errors are unavoidable. By being pessimistic from the get-go, you can create wiggle room in your budget and better prepare for unexpected downturns.
4. Set Budgets for Your Employees and Key Projects
Sticking to a budget for a small business involves everyone at the company. That means setting budgets for individual employees and key projects. Not only will this give team managers greater control over expenses from the outset, but it will empower employees to contribute to the overall company’s financial goals.
Business News Daily says it perfectly:
"A proper budget is far too important and there are too many variables for this responsibility to fall on one person’s shoulders. An ideal budget should undergo intense scrutiny by a team of employees with a diverse set of skills to effectively manage a small business budget. By relying on a coordinated team, you can approach your budget from different perspectives to ultimately expect the unexpected and plan accordingly."
As a business owner, keep employees aware of both short-term and long-term financial goals and let them know how they can help you reach them. Key projects that require additional investment should have a separate budget and someone empowered to oversee it. Remember, it only takes one employee or key project to blow your whole budget.
5. Equip Your Team with the Right Finance Tools
Having a clear picture of your financial situation when and as it happens can help you control expenses more effectively. It also ensures you’re sticking to your budget in real-time, rather than waiting until the month’s end. For this, the two most effective tools include:
- Accounting platform – The right accounting platform helps you track income and expenses and digitally generate financial statements to help you keep your eyes on your top and bottom line. The most popular accounting platforms for small businesses, QuickBooks and Xero, will sometimes have integrations with key finance tools to help you streamline Accounts Payable and Accounts Receivable processes as well. The most robust systems are directly integrated with a corporate card spend management platform to help you reconcile transactions with the click of a button and monitor your expenses in real-time.
- Corporate card – A corporate card offers much more than a business line of credit. When integrated with an accounting platform, some smart corporate card platforms like Ramp allow for all transactions to be approved and logged into the general ledger with the click of a button. This avoids timely end-of-month expense report workflows, and allows executives and team leads to have more control over spend.
When these two tools are combined (i.e., smart corporate card with built-in expense management + synced accounting platform), they greatly increase your visibility over finances and create workflow efficiencies company-wide.
6. Look for Duplicative Spend Items or Unused Vendors
When operating a small business, it’s hard to have all the structures in place to catch every mistake. When creating a budget, it helps to know what you’re spending and where. And that includes staying vigilant of duplicate expenses or redundant vendor services.
This is especially true when it comes to the "SaaS (Software-as-a-Service) creep” phenomenon. Some businesses realize they have been paying for a monthly software service it no longer uses, needs, or has replaced with another service. Because it’s set to auto pay, it’s easy to forget to cancel. But those "small" monthly fees add up.
Not only that, but two different teams or departments may both be paying for software that could be utilized with the same subscription.
To prevent these scenarios, check your monthly expenditures periodically and confirm that you’re only paying for what you need.
7. Identify Your Highest Cost Centers and Negotiate With Vendors
Your cost centers include the support and service roles that cost money. They are necessary for you to run your business, but they don’t generate revenue.
A cost center could just be one person like an office manager, a bookkeeper, a janitor, or an IT specialist. Or, it could consist of a group of employees, like a customer service team or a research and development team. Make sure there’s a budget for each cost center and that it’s run as efficiently as possible.
Vendor accounts are another area to look for money-saving opportunities. Many people don't think or are embarrassed to ask for discounts from their vendors, but it's a very common practice, especially in economic downtimes.
By creating strong relationships with suppliers and vendors you can have open discussions about discounts for their regular services or supplies or renegotiate your prices with them. With new vendors, talk to them about any discounts on supplies or services right away. You never know what’s possible unless you ask and are willing to have transparent conversations.
8. Outsource Where It Makes Sense
To help cut down costs, identify places where you could strategically outsource tasks and services. There are plenty of easy outsourcing and contractor groups available that can help you get ahead of a project, so you don’t have to hire a full-time employee right away. To find these outsourcers, try:
- TopTal for high-end software engineers and project managers
- DesignHill for all types of designers such as graphic or web designers
If you need extra help or have seasonal needs, local temporary employment agencies are a great resource. They vet and identify candidates and handle all taxes and administrative paperwork.
9. Audit and Review Expenses Regularly
Ideally, experts suggest you review your budget every month. According to Paul DelFino, a partner of small business consulting firm Opportunity Inc., “Most entrepreneurs do the budget, congratulate themselves, put [it] in a drawer, and move on.”
Don’t do that.
DelFino suggests that you compare your original projected budget with your actual budget every month. This way, you can make adjustments as needed rather than at year-end when it's more difficult to fix problems or pivot.
Regular audits to review charges can help you understand where recurring expenses could be cut. Watch for those "little bills" all businesses have, like takeout lunches for employees, or the midday Starbucks coffee run. While they might be part of “productivity” spend, they can add up quickly.
10. Practice Makes Perfect
Even though it may be difficult to budget and forecast your financial future in the beginning, the more you do it, the better your projections will be over time. Focus on these three things to set you and your business up for success:
- Put into place simple spend processes and practices
- Make sure you are using the right financial tools for you and your business
- Implement a regular budget review into your calendar
By utilizing these practices, your budget accuracy will improve, especially when you supplement your efforts with automation through your accounting platform and corporate card.
And don't worry about budgeting to the last penny. You won't ever have perfect figures. Your budget is about creating a roadmap for you and your employees to follow as you strive to hit your goals for a happy, successful, and prosperous future.
Ramp: Helping You Budget Better
Budgeting for small businesses can be overwhelming and take many forms. To make the budgeting process as painless and accurate as possible, Ramp has developed a system to help out in all the key ways:
- A robust cash back program of 1.5% on everything you spend
- Unlimited virtual and physical credit cards to control expenses
- Real-time spend monitoring.
- Automated receipt matching, tracking, and reminders
- Automated expense management
- Robust vendor management to help you identify unnecessary spend
Let the platform automate your accounting workflows and find savings for you, all while giving you 1.5% back on all the money you spend. That’s Ramp in a nutshell.
Harvard Business Review. How to Design a Winning Business Model.
Business News Daily. 7 Smart Budgeting Tips for Small Business Owners.
Inc.com. Is Your Budget Ready for the Worst Case Scenario?