Business Finance
Developing a Budget
Written by Kathryn Lang for Gaebler Ventures
Understanding money and learning to control the flow of finances can be two of the most valuable tools for any entrepreneur.
Entrepreneurs value money.
It can be the tool that builds a business or the treat that drives the desire for that business. Understanding money and having a strategy to use and gain that money can be the most important step that an entrepreneur can take.
Tips to Create a Sound Budget
Knowing where money currently goes and how money comes in will help you determine a budget that will work for your particular needs.
1. Write down all of your expenses for a full month. Include any items that you spend on miscellaneous needs as well as those items that you pay monthly.
2. Put all of the items into categories so that you can get a view of how you are currently spending your money.
Every entrepreneurial business will draw income in different ways. Some businesses will have contracts that pay on a consistent time schedule. Other businesses are based around contracts that pay out as the projects are completed. Creating a monthly budget for income that comes in sporadically will be a recipe for disaster. Each budget has to meet the income limits of the entrepreneur.
The envelope method has been around for decades. This budget method sets up one envelope for each category of the budget. As money comes in then that money gets broken down into the different envelopes.
EXAMPLE: The total budget for the business is $5000 per month. That breaks down to $1000 for rent, $1000 for payroll, $1500 for personal taxes, $500 for office supplies, $500 for utilities, and $500 for reinvestment.
Rent = 20%
Payroll = 20%
Personal taxes = 30%
Office supplies = 10%
Utilities = 10%
Reinvestment = 10%
A check arrives for $1000. That money can go into the rent envelope to complete supply it for the month. Or it can be broken down into each envelope according to the percentage:
Rent = $200 (or 20% of $1000)
Payroll = $200
Personal taxes = $300
Office supplies = $100
Utilities = $100
Reinvestment = $100
The key to making the envelope system work is to NEVER take money out of one envelope to pay for another envelope.
Weekly payments can make using the envelope system a little more difficult. When the amount of money that comes in each week is known in advanced then the entrepreneur can schedule out payments so that they are even spread throughout the month. Each week the money that comes in pays on those expenses scheduled for that week. Remember that it is okay to make a payment earlier if it works into your schedule but always avoid making payments late.
Monthly incomes can be almost as difficult as the unexpected income. Entrepreneurs have to be disciplined with the income to make it work for the whole month. The envelope method may work for some. Others may want to pay all payments when the monthly income arrives so that the temptation to spend the money on other items can be nipped from the beginning.
All budgets need to be working on money that arrived last month instead of money that is expected to arrive. The ideal situation for a sound budget comes with being a few months ahead of payments so that a fund for unexpected expenses can be started.
Kathryn Lang is a professionial writer and motivational speaker. She enjoys writing about a wide variety of business topics including youth businesses and finance.
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