Budgeting Essentials For Small Businesses
Coach Dan Dollevoet walks us through the less obvious value of budgeting, and why small budgets should make one even if they feel they have their finances in order.
A few years back, I worked with a client who had been running her business for five years, but had no idea if she was actually making money. She wasn’t careless, in fact, she was incredibly talented and conscientious. But like a lot of business owners, she avoided budgeting because it felt intimidating. She thought spreadsheets were for finance people, not creatives.
But here’s the truth: budgeting isn’t some secret science, and isn’t about impressing accountants or investors. Budgeting is the best tool you have for understanding your money, and for nurturing the confidence you need to build a business that actually supports your life.
No finance degree necessary.
Start With A Goal In Mind
You’ve probably heard this quote, “If you don't know where you are going, any road will get you there.” It’s by Lewis Carroll, and seems pretty obvious, right? But you’d be surprised how many business owners skip this critical step.
I’ve worked with clients who say they want to “grow”, but haven’t defined what growth actually means to them.
So my question is, “what does growth mean to you?”
Do you want to scale? Hire a team? Open a second location? Or do you just want to make enough to take Fridays off and coach your kid’s soccer team?
Your budget should help you build towards that vision.
Once your goals are clear, you can reverse-engineer what kind of revenue and expenses you’ll need to get there.
Know the Difference Between Fixed and Variable Costs
This is the foundation of understanding your profit. It’s not complicated, but it is critical, because profit sits at the center of your business, and to fully appreciate that you need a clear view of what’s going out the door, why, and at what cadence.
- Variable costs are tied to sales (materials, labor, packaging). They are what it costs to actively run your business. They are what you pay to make a sale. For example, in order for McDonalds to sell a Happy Meal, they have to pay for the toy, the burger, the fries, and the packaging. These are variable costs.
- Fixed costs show up no matter what (rent, insurance, software). They don’t change month to month, and they need to be covered, even in a slow season.
Track Cash Flow Like Your Business Depends on It
While profit sits at the center of your business, cash is what keeps it alive.
You can be profitable on paper and still struggle to make rent. That’s why tracking when money actually hits your account (and when it leaves) matters just as much as how much you’re making.
This is where tools can be a game-changer.
Most of my clients use Google Sheets because it’s easy to update and share with a bookkeeper. Use whatever keeps you consistent, because consistency is the only rule.
Personally, I use Excel. Some of my clients use QuickBooks or Xero. Others love Novo, especially the Reserves feature, which automatically splits their income into buckets, which is especially useful if you follow the Profit First method, which says that you should take every dollar that comes in the door and treat a fixed percentage of it as profit before paying expenses.
This method allows you to better predict your profitability, and identify problems with spending before they become critical. It’s a mindset shift, and it can work wonders.
Choose the Budgeting Method That Fits You
Not everyone needs a 10-tab spreadsheet. But everyone needs a system. Here are four I use with clients, depending on their business model and personality:
- Zero-Based Budgeting: Every dollar that comes in is explicitly allocated towards savings, debt service, and expenses. Each month, what’s coming in should “zero” with what’s going out. All dollars are accounted for.
- Incremental Budgeting: A retrospective method that looks at your previous budget and makes incremental adjustments to it in order to account for changes – inflation, increased cost of goods, capital needs, etc…
- Activity-Based Budgeting: Builds a budget around specific activities that are core to your business, seeking to understand them deeply and put a price on them. If you plan to sell 5,000 widgets for $5 each, you’ll need $25,000 in the budget to pay for them. Can be ideal for service-based businesses or seasonal work.
- Flexible Budgeting: The most straightforward method, it’s a budget that adjusts monthly, based on what’s actually happening in real time.
Progress > Perfection
A lot of business owners give up on budgeting because they think it has to be perfect before it's useful. It doesn't.
The point of your budget is to act as a roadmap, to take you where you want to go. So start with that in mind, start with your goals, choose a method that fits your workflow, and check in regularly. That’s it. You’ll get better over time, just like anything else in business.
And if you’re feeling stuck or overwhelmed, I’m here to help. This is what I do, and I genuinely love helping business owners get a handle on their numbers so they can make confident, informed decisions.
Stay Connected with Dan
Dan has 25+ years of experience helping businesses improve and optimize their operations. He combines his financial analysis and planning expertise to solve problems and help clients increase profitability.
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