5 Expenses to Consider When Establishing a Budget
We constantly hear people talking about the importance of budgeting. Today there are apps, templates, and a bunch of different strategies on how to build one - but can we first start with the basics? What is a Budget?
A budget is a plan for the business' money, which includes both historical data and forecasts of future income and expenses.
It is necessary for every business owner to write a budget plan. As we have seen the economy experience some big changes these last 2 years (thanks, covid) it is best to prepare for any unexpected events now.
If businesses do not prepare a budget then they may be sacrificing profitability. It is one of the main tools for a service based business, or any business to measure its success. Without one, it can be hard to measure what the problem is and how it can be fixed.
When establishing a budget for a business, it is important to consider all the expenses that are necessary to start, maintain, and grow your company. Being a business owner means that you are responsible for these financial decisions.
Type of Business
Now, the expenses that a business must consider when creating a budget are also dependent on the type of business they have. For example, it is common for service based businesses to have little investment or overhead needed when compared to product-based businesses. Product based businesses have to worry about items like equipment, warehousing, and raw material investment.
Type of Expenses
A service based business is typically defined as a business that provides services rather than goods. These services can be anything from mortgage lending to marketing, making it difficult to list all the possible expenses that could come up when trying to create a budget.
The list below highlights the most five common types of expenses that come up when creating a budget for service based business:
Staff compensation and payroll taxes
Rent or lease payments for property or equipment used in your company’s operations
Utilities such as electric, gas, water, internet
Insurance coverage for your company’s operations and its employees
Office supplies and materials - This may include paper, toner, toilet paper (yes really), pens/pencils/markers/highlighters, etc.
As we mentioned, it is important to consider all expenses when developing a budget. We listed a number of expenses above but there are 2 main types of expenses that can help you brainstorm all expense areas that may affect your budget.
Operational & Non-Operational Expenses
It's important to consider both the operational and non-operational expenses when budgeting. Operational expenses include costs related to the day-to-day operations of the business such as salaries of employees, rent, and utilities. Non-operational expenses are those that don't come with an ongoing commitment or direct costs such as marketing, advertising, and investment in new projects.
The business budget is often overlooked. It may seem like something that can always be dealt with later. We don’t just mean checking your bank statement, that’s not a budgeting strategy. We mean to actually sit down with pen to paper, excel, or even your accounting software like Quickbooks Online, to help you come up with a budget.
Lastly, if you already use accounting software like Quickbooks Online, you can easily find a list of your expenses as long as your books are accurate and updated. This can be done by referencing your P&L, Balance Sheet, Chart of Accounts, or General Ledger.
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Why is a Budget Important?
When it comes to budgeting, managing income versus expenses can be one of the biggest challenges to business owners. However, if you establish a budget early in your business, the more prepared you will be for any expenses that arise.
Some of the benefits of establishing a budget are:
· It helps you see exactly where your money is going
· Discover different ways to cut down on costs
· Ensures all expense areas are accounted for
· Helps create a plan that will help maximize profit over time
Entrepreneurial success hinges on the quality of a budget. A good budget provides a framework for strategic thinking, evaluation, and execution.
Depending on the budgeting strategy you use, a revenue goal can also be established. This will be used to help determine how much income needs to be generated.
The type of expenses to consider when establishing a budget is an important step to ensuring you have a great budget and set yourself up for growth. Without one, a business will not know how much money they must spend on different things like marketing, operations, or finance. They also won't know how much money is being spent in total, so it is hard to evaluate if they are running efficiently or not.
So, regardless of if you are a service or product-based business, having a budget is the beginning of setting your business up for success!
If you are ready to begin building your budget, consider scheduling a consultation with us by visiting the link below.
