Creating a Budget for Your Small Business

Most people assume the hardest part of starting a new company is getting it off the ground. They figure the most stress comes from raising capital and appealing to customers before you have any sort of track record or name recognition.


While those early days are certainly no walk in the park, the real battle typically arrives later on. Launching your startup takes such singular focus that you keep yourself on track and avoid distractions. You also have the benefit of a clear and defined goal - opening the business - which can help keep you motivated even in the face of adversity.


Meanwhile, once the Grand Opening sign comes down and customers start building expectations, things can become much more difficult. If you don’t believe me, take it from the Small Business Association. According to an SBA study, 30% of small businesses close within the first two years of operation, and that number goes up to 50% within the first five years and 66% in the first 10. As hard as it is to get a business off the ground, entrepreneurs tend to struggle more as time goes on.


As a business owner and financial advisor, I see a very clear connection between bad budgeting and failed endeavors. Most new business owners are passionate and hardworking and intelligent; they understand economics and customer relations and all the necessary factors that make a company run smoothly. The problem has nothing to do with work ethic and everything to do with managing money. It’s an understandable problem since a new business venture often requires a good amount of debt, something you don’t usually associate with smart financial dealings.


Creating a budget when your business has yet to earn a dollar might seem like a waste of time, but it’s one of the best things you can do to set yourself up for success. With a proper spending plan and some financial foresight, you might avoid the pitfalls that 50% of small business owners fail to sidestep during the first five years.

Budget for Your Salary

If you decide not to pay yourself, in an attempt to either be selfless or give your fledgling company a cash flow boost, you’re making what will likely turn out to be a huge budgeting error. Even if you spend 24 hours a day in the office and live off free snacks brought by coworkers, you can’t sustain a life in which you aren’t properly paid.


The problems of an unpaid CEO usually manifest in two very clear ways. The most obvious is a stressed out, overworked, unhappy business owner who can’t make ends meet. You have to sacrifice a lot to become your own boss, but cutting out the ability to afford basic necessities isn’t an option. It doesn’t take long to see that this pay structure is unsustainable.


The other problem becomes apparent a little more slowly. For those business owners who eat, sleep and breath their company, sacrificing a salary comes naturally. There are no vacations to take, no meals that aren’t bought on the company card, and no time to worry about personal savings because nothing matters more than the business. In the first few months, or even the first couple years, you might hardly notice you’re working for free.


At some point, that will change. You’ll either decide you deserve some take-home money or you’ll have an unexpected expense to cover, and those funds will naturally come from the business account. If your car breaks down and you need to get to work, your company has to help you buy a new vehicle. After all, it’s your company! If it wasn’t for you, no one would get paid!


You deserve that car, just like you deserve the salary you should have been taking from day one. The difference is, when you establish a budget that doesn’t account for your personal earnings from as soon as the business launches, you have to do some serious book cooking to change that system. You simply can’t run a business efficiently when you take payments on an as-needed basis. That might feel like a way to keep the company’s cash reserves high, but it’s inefficient and leads to massive headaches.


Skipping over CEO salaries also lead to conflicted CEOs. If you don’t have an obvious income and instead just live on the fringes of the company payroll, your personal finances become wedded to the company earnings in an unhealthy way. Yes, small business owners rely on their companies to create revenue, but blurring the line between Bob’s bank account and Bob’s Hobby Shop’s bank account can lead to a real financial mess. In addition to losing track of who paid what to who and when, Bob might really blow it on his taxes when it comes time to file.


Your own salary might not be a top priority as you build a budget for your small business, but I recommend putting it high on the list. If you don’t consider your earnings at the outset, this is the type of problem that will fester and lead to bigger troubles as your company grows. Don’t get greedy, but don’t forget to factor in your cut each month.

Budget for Your Risks

There are a lot of budgeting advisors and money managing tools at your disposal. Unfortunately, just because some system has great reviews and worked wonders for another entrepreneur doesn’t mean you’re guaranteed the same result. In fact, someone else’s brilliant budgeting system could easily neglect the most important aspect of your operation.


It might help to think of risk budgeting in terms of insurance. You have liabilities, for which you will need to be insured. And while a good policy mitigates risks and protects from catastrophic events, your company remains susceptible to costly incidents and changes. Not every problem makes itself known as obviously as a hurricane or a fire, and it all needs to be on your budgeting radar.


For example, a quick stroke of a politician’s pen can set events in motion that lead to a spike in insurance premiums. If you have a health plan with 10 employees enrolled, a relatively small price change will leave your accountant reeling. The same could happen if your rent goes up, the price of oil skyrockets or an important piece of your inventory falls under new regulatory guidelines and becomes more expensive. In these instances, the only way to insure your business is to have a risk-minded budget.


Naturally, you can’t set aside money for every potential issue that could ever befall your business. It’s an absurd notion to think you can prepare for everything and I’m confident anyone who’s ever owned a business will back me up on that. However, you can budget your known expenses in such detail that you’ll know exactly what’s available for your miscellaneous and last-minute savings.


When it comes to personal budgeting, I tell people to work on an emergency fund even while they try to pay down debt, the reason being that extra savings will help you avoid falling deeper into the red when the unexpected happens. Emergency funds are just as important, if not more so, for a small business budget. So many costs and fees catch young business owners off guard and you won’t survive those rough patches without the right financial planning.


I understand this may feel like guesswork; guess what disasters might arise and then guess how much that will cost. Instead of aiming to predict the future, just make a list of the common risks and financial liabilities in your industry:


  • Flooding
  • Fire
  • Theft
  • Recalled product
  • Production cost increases


With these potential issues on your radar, you can look at your monthly spending and earnings with a better understanding of how much money can be considered working capital and how much should be considered off limits.


This type of planning also helps inform the decisions you’ll make should an unexpected expense force you to rework your budget. You might not have enough in the emergency fund to cover an entire lost shipment, but you will know where the additional funds can come from. A thorough, detailed budget doesn’t detract from your financial flexibility, but rather makes it easier for you to reassess and move money as needed.


You can’t avoid surprise expenses, but you also can’t spend all your time planning for them. Keep them in mind when you budget, then get back to earning money that can go into the salary I’m demanding that you pay yourself.

Budget With Your Team

You should not invite every employee into a budgeting meeting. You should, however, have each and every one of them in mind when building a projected budget. You should also get their input where you see fit.


Because each small business is unique and full of distinctive individuals, there’s no such thing as a one-size-fits-all budget. From supplies to wages to paid time off to holiday parties, your workers and colleagues will influence your accounting in a plethora of ways. You can try to force all the idiosyncratic needs and tendencies of those people into a predetermined budget, but I think you’ll have a lot more success if you let the situation inform your spending.


Of those small businesses that don’t make it past the first two years, I’m willing to bet that a big component of the failure is short-sighted frugality by the owner. It can be hard to spend money on equipment or training aimed at increasing worker productivity; if you didn’t have to spend that money and productivity just happened naturally, everything would be great. Unfortunately, that type of thinking often leads to an underperforming business.


In the early days of a startup, you’ll be almost exclusively focused on customer needs. After all, without someone to buy your products, you won’t have any revenue with which to pay employees. While you have to look out for customers, you need to reserve at least a little of your time to think about how money can be spent to get the most out of the people behind the counter.


How this translates into your budgeting is up to you. You might offer bonuses or pay for workers to go to seminars; you could spend a little extra on office amenities to keep the workplace pleasant. Some tech companies force workers to take multiple weeks of paid vacation, emphasizing the importance of a work-life balance.


There’s another good way to factor your team into the business’s budget, and that’s keeping them abreast of your quarterly goals. If the people you employ don’t know the difference between a bad month and a good one, you shouldn’t be surprised when they don’t work with the same tenacity as you. If you incentivize with company-wide budgetary goals, people will likely become more invested in the business’s day-to-day success.


When it comes down to it, large-scale budgeting can really drain a person. If you take sole responsibility for how and where every penny gets spent, you’ll start to burn out and make mistakes. If you let a few people - again, you probably don’t want to take an all-hands-on-deck approach to budgeting - help you figure out the math, you’ll make better decisions and create a more sustainable spending plan.

Budget for the Seasons

Whether you’re a lawyer or a scuba instructor, changing seasons bring fiscal shifts to your company. There’s no way to avoid it, so you better not choose to ignore it.


Some of the obvious ways the calendar will affect your bottom line:


  • Weather
  • Holidays
  • Vacations
  • Consumer activity


If you don’t consider these issues in advance, you’ll spend the entire year scrambling to figure out why revenue was high one month and then plummeted the next. You might not understand how seasonality will impact your company’s budget at the outset, but you can keep a close eye on developing patterns to inform decisions going forward.


It might not feel like the time of year would have much effect on every business, but it really, truly does. Even if you sell the same products or services year round, rain and snow will influence how and when consumers show up. Even if you exclusively sell goods online, excellent weather might have people spending more time outside and less time visiting your website. Then you have to think about when people are spending more on their own vacations, holiday shopping, taxes, etc.


As you learn more about your company’s cycles, you’ll get a feel for which months require extra saving and which allow for extra spending. Once you fully grasp the seasonal effect, you’ll start planning ahead, using summer money to pay for the winter slowdown or vice versa.


Most of all, you’ll learn that an annual budget is useful in some ways and entirely useless in others. The budget you create on January 1st could look brilliant through mid-February and become absolute nonsense at the beginning of March. You can’t let yearly goals get in the way of making decisions in the moment. Don’t lose sight of that annual budget, but don’t forget that every season plays by a different set of rules than the one before.


As your business develops and your financial picture gains clarity, the specifics of your budget will become more defined. At that point, all of these larger topics will become more focused and hopefully more manageable. While you wait for that time to come, you still have to figure out how to manage your money and create a spending plan that works for both the short and long term.


Budgeting isn’t easy, and it’s downright overwhelming when combined with the stress of starting a business. However, a good small business budget can be the difference between launching a successful company and having a premature Going Out of Business sale. Don’t become another sad SBA statistic - take the above issues into account and make your business budget a top priority.