A Fast and Easy Way to Build an Expense Budget
If you’re planning a new business, it’s always fun to dream about where you’re going to be in a few years.
But, to be successful, you’ve got to build a profitable business. That means making sure that you’re spending less than you’re making—unless you’ve got a big pile of money from investors. Even if you do have lots of cash on hand from investors, your goal is still to turn a profit eventually. All of this means creating and managing your expense budget.
We’re talking here about the “expense budget,” but you could also call it a spending budget or an expense forecast, or even projected expenses. All of these labels mean the same thing, so just choose one that works for you and move on.
Your expense budget is one of the keys to good management.
Set your budget and then track what you actually spend against that budget. Review the results and revise the budget as necessary.
The important thing to remember with budgeting is that you’re making educated guesses, just like every other business owner out there. You don’t need to have a fancy Masters degree or tons of business experience to create a solid budget, and you don’t have to be a fortune teller either. In fact, it’s really very similar to a budget that you might have for your personal finances. Armed with a little knowledge and advice, you’ll be creating an expense budget in no time.
Your expense budget is an important part of your overall financial plan for your business. It makes up the biggest part of your profit and loss statement, and feeds critical information to your cash flow statement.
What not to include in your expense budget
The most common mistake entrepreneurs make with their expense budget is including some things that don’t belong there.
It would seem logical that all spending should go in the expense budget, but that’s unfortunately not the case. Expenses are deducted from your sales to determine your profitability, but there are other kinds of spending that belong in different parts of your financial forecast. Here are a few things that you need to make sure to keep out of your expense budget:
Don’t include direct costs
Direct costs, otherwise known as “cost of goods” or COGS, belong in your sales forecast, not in your expense budget. Direct costs are essentially what you spend to make your product.
Don’t include asset purchases
When you buy a car, truck, large piece of equipment, or inventory, you’re spending money, but that spending belongs on the balance sheet and the cash flow statement. The same holds true for other asset purchases, improvements you make to your location, and some startup costs.
Don’t include payments on loans
This one is a bit tricky, but here’s the rule:
The interest you pay on a loan belongs in your expense budget, but the repayment for the principle belongs back on the cash flow statement and will impact your balance sheet.
What you include in your expense budget is nearly everything that’s left over. These are often what are called “operating expenses” and include things like rent, marketing, PR, advertising, and payroll.
Now that you know what not to include, take a few minutes to think about how you might want to organize your expense budget. What is on the list of things that you plan on spending money on? You’ll want to have several categories for your expenses, but you don’t want to have too many categories.
Think about the groups of things that you spend money on and consolidate your list where it makes sense. Also, think about the things that you want to track and keep a close eye on—those things that you want to pay special attention to should have their own categories.
Here are some common expenses to help get you started:
Interest payments on loans
You can certainly have more categories, and for some businesses, this makes a lot of sense. For example, if you have a large marketing budget, perhaps you want to track it in more granular detail. At this point LoanGuru is important and a big help for you. to find the perfect lender for your financial support!
How to figure out what the numbers should be
Don’t get hung up thinking that you can’t figure out the numbers, that should go in your expense forecast. At the end of the day, you just need to make some educated guesses and then adjust as you learn more about your business.
Start by doing some research. If you’re just getting started, look at real estate listings to figure out a rough estimate of what your rent might be. Get a quote from an insurance agent to figure out what you might need for your business. Make an estimate about what you might want to spend on marketing.
All it takes is a little research to figure out, roughly, what your expenses are likely to be. Don’t worry about getting it exactly right. You’ll never be 100 percent correct. Instead, focus on “close enough” and then refine and adjust as you grow your business.
Another useful trick is to calculate an expense as a percentage of your sales. This is a common way to calculate some marketing expenses, such as “pay-per-click” advertising.
You can estimate that you’ll spend something like 10 percent of every sale on online advertising (or whatever is the right percentage for your industry). Then, as you adjust your sales forecast, your expense budget will automatically adjust appropriately.
Break out payroll into its own list
Because payroll is often one of the largest expenses for a company, it makes sense to calculate that separately from the expense budget and then copy the payroll total into the expense budget.
List out your employees if you don’t have too many, or use categories of people like “customer service” or “sales.” Then input the total salary per month for each person or group on the list.
Don’t forget to pay yourself!
Once you know your total payroll expenses, you can take this number and add it to your overall expense budget.
Track, review, and revise
The goal of setting up an expense budget is to help you make good decisions about your business.
To make your expense budget work for you, make sure to set up a monthly review meeting. Usually, doing this a week or two after the end of the month is a good time. Sit down and see how your actual spending compared to your budget. Did you stay on track? Did you go over budget or come in under? Maybe some over budget and some under.
Also, compare your expenses to what happened the same time last year, or the previous month if you haven’t been in business for a year yet. Check out the trends and adjust course or adjust the budget if necessary.
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