From the world of personal finance, we all know the importance of having a budget. Even a basic rundown of fixed expenses (rent or mortgage, utilities, insurance, etc.) and more variable expenses, like eating out, helps keep things headed in the right direction. Perhaps you even have goals to save for specific things like a vacation or a remodel.
Ideally, you’re comparing your budget to what you’ve spent every month or so to make sure that you’re on track—you don’t want to overspend, and maybe you need to keep moving forward towards specific goals, whether it’s paying down debt or saving for a holiday. Maybe you use a tool like Mint or You Need a Budget to keep track of your personal spending.
Keeping track of your business’s expense budget is really not that much different than managing a personal budget—in fact, it’s strikingly similar with just a few differences.
The first thing you need to do is create your expense budget. Budgeting for business isn’t much different than creating your personal budget. You probably have expenses like rent, insurance, utilities, etc. Unlike your personal budget, you probably also have expenses related to marketing and likely have payroll expenses as well. We’ve covered the process of creating an expense budget in more detail before, so I won’t repeat those details here.
Once your budget is in place, the most important next step is to set up a process for tracking your spending. If you don’t already use an accounting product like Quickbooks, start there. Every business should use accounting software to keep track of sales and expenses—it’ll make your life significantly easier as you grow and make tax filings simpler when that time of year comes around.
The next step is to compare your actual spending that you tracked in your accounting software to your budget. You can certainly do this in a spreadsheet, but it’s much easier to use a tool like LivePlan which will compare your budget to your actual spending automatically and presents that data visually in a business dashboard.
Ideally, you should compare your budget to your actual spending at least monthly, when you’re reviewing and analyzing your main three financial statements: balance sheet, cash flow, and income statement or profit and loss. If you’re over budget on certain items, you’ll want to know this as soon as possible.
When you’re reviewing your budget compared to your actual spending, you may see the following situations:
You’re over budget for the month
Before you rush to slash spending, remember that being over budget may be the result of something good: increased sales. You may have spent more on marketing, for example, and that marketing has resulted in more sales than you planned. In this scenario, being over budget is probably OK and you may want to revise your budget moving forward to plan for increased spending in marketing.
You’re over budget for the month, but still have many months in the year to go
When businesses create budgets, sometimes they take a simple approach and create a budget for the year and then just divide by 12 to build the monthly budget. There’s nothing wrong with this approach, but it may result in things looking better or worse than expected in any given month.
In this scenario, you may want to look at the full-year budget and see how you’re tracking against that spending goal instead of just looking at the individual month. You may find that you’re over budget for an individual month, but you know that you’ll be under budget in future months and will stay on track for the rest of the year.
What about unexpected expenses?
Let’s say you created an annual budget for marketing and then spread the budget out evenly over the 12 months of the year. But, it turns out that you need to spend the bulk of that annual budget over the course of just one or two months. Ideally, you start planning for this scenario before it actually happens.
In this scenario, it’s important to look beyond just your expense budget and look at your cash flow forecast to determine if spending the bulk of your annual budget in a single month or two makes sense for your business.
If you haven’t built a cash flow forecast, you’ll find that it’s worth your time to do it. It can answer tough questions like this: can I afford to spend this money now or do I need to wait?
Your cash flow forecast does this by predicting how much cash you’ll have in the bank every month of the year, based on what you expect to make in sales and what you plan to spend. Creating the cash flow forecast is a little more challenging than an expense budget, so using a tool (again, like LivePlan) to accomplish this goal is well worth it.
Once you know how much cash you’ll likely have on hand each month, you can make informed spending decisions and figure out if spending the bulk of your marketing budget in a single month is a good idea or not.
Keeping track of your expense budget should be a fairly straight forward process and will ensure that you run a healthy, successful business. I encourage you to not skimp and use online tools that will make this process relatively simple and painless.