With enough money to pay your business expenses and earn a profit, your business can continue to grow. To get there requires planning, and a budget. Here’s how small business owners can plan for common business expenses to create a business budget that works.
What Is A Small Business Budget
A small business budget refers to the money you expect to bring into your business, how you plan to spend it, and how much you’ll have left over in profit. Your budget will change throughout the life of the business, but if you don’t know what it costs to run your business, you may end up in debt or making choices that hurt the long-term success of your business.
According to a 2020 survey by Clutch, only half of small businesses surveyed had a formal budget, but those that do tend to stick with them. This suggests that having a budget in place helps companies stay on track.
There are two sides to a budget: revenues and expenses. Revenues refers to the money you bring in, and expenses refers to the money you pay out. Anticipating and planning for business expenses is key to maintaining a good budget.
What Is A Business Expense
A business expense refers to a cost incurred in the course of doing business. These expenses can range from the rent for a business’ building, to the cost of different softwares used in the business, to the money that must be paid for taxes.
There are many types of small business expenses, and small business owners are often particularly interested in knowing which business expenses are tax deductible.
Tax Deductible and Non-Tax Deductible Expenses
Tax deductible expenses are those that a business can subtract from taxable income (often called “write-offs”), while a non-tax deductible expense is one that can’t be subtracted from taxable income.
The IRS requires that a business-related expense meet two requirements to be considered tax deductible:
“A business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” Source: IRS
However, it is worth remembering that a tax deductible expense may still be subject to additional IRS rules and regulation that may include the total amount that can be deducted from each category, when deduction(s) can be taken, and more.
Types Of Business Expenses
Beyond knowing whether an expense is tax-deductible, or not it is also worth figuring out how many of the business’ expenses are fixed, variable, or periodic. Categorizing expenses this way can be helpful when forecasting future expenses.
A fixed expense is one that stays constant over a period of time. These expenses tend to be easier to budget for as they don’t change for a certain amount of time. At the same time, though, they can be difficult to adjust without a significant change in the way the business operates.
One example is rent. If your business needs a bricks and mortar location and you don’t own the property, you’ll have to pay rent. Businesses often must sign leases for two to ten years or more, and it’s expensive to break a lease or to move.
Another example is payroll. If you have salaried employees and business slows, you may have to lay off employees or even let them go.
Variable costs are just the opposite of fixed costs. These costs vary over time and are often tied to a business’ performance. Some of these costs may go up when the business is doing well; a business may need to buy more supplies, for example, or ship more goods. Employees may take more business trips, or the business may need to offer more employee benefits to attract new employees and retain current ones etc.
Variable expenses can be the easiest to control, but they don’t always fluctuate in direct proportion to how well a business is doing. Take advertising. A business that is growing rapidly may want to ramp up advertising. But a business that is struggling may also spend more on advertising to try to stay afloat.
Either way these costs aren’t staying constant, which makes it more challenging for the business to plan ahead.
Periodic expenses are those which are either not regular, or sometimes, not predictable. They may include quarterly taxes, for example, or annual insurance premiums.
They may also include building maintenance for the building, or service on computers and other equipment. These can really trip up businesses that don’t budget for them. It’s crucial your business sets aside funds for periodic costs or you may wind up having to borrow with a credit card, line of credit or other financing.
How To Categorize Expenses
While it’s helpful to know which expenses are tax deductible and which aren’t, and to understand which are fixed, variable or periodic. But those categories are still fairly broad. Your job when you’re creating a business budget is to plan for specific types of expenses.
That’s especially challenging for startups, where the entrepreneur may not know what to expect. But budgeting is just as important for businesses that are growing.
Common Business Budget Categories
Here you’ll find common business expense categories. These can help you identify the types of expenses you may need to include in your small business budget. Every business is different, of course, so you’ll need to adjust for your specific b business needs.
Business insurance can be a major expense for many businesses, but also a necessary one. As businesses tend to carry multiple types of insurance (health insurance for employees, liability insurance, business interruption insurance, property insurance, etc) it is important to track not only which types of insurance the business needs and holds, as well as how much each policy costs.
Another important expenditure is loan payments and interest. If your business has taken out a small business loan, not only should you keep track of how much payments cost, when they are due, and how much you’ll pay toward interest and fees.
Companies advertise on so many different platforms, so you’ll want a broad category for marketing and advertising expenses. Online and social media platforms make it easy to track your spending and calculate important metrics like cost per click. If you engage in other types of advertising, such as sponsoring a sports team or running a magazine ad, it’s harder to calculate your return on ad spend. Still you want to anticipate how much you plan to spend. This is a budget category where it’s easy to overspend.
Growing businesses will undoubtedly have growing payroll expenses. Being able to plan for and track employee salaries, hourly wages, and commissions is essential. For example, if you see a big increase in payroll due to lots of overtime it may signal a need to hire another full time worker.
Don’t forget to budget for payroll-related costs such as payroll taxes, employee benefits and workers’ compensation insurance.
Rent and Utilities
Not all businesses will need office space, a storefront, storage facility, or warehouses, but those that do will need to budget for rent (if they lease their space) and utilities. This category is especially important for those that may be thinking about investing in purchasing their own facility, as it can provide a good gauge for what they can afford.
It can be hard to find ways to save money when running a business, but shipping can be one category where you may find savings. If you begin to ship in high volumes you may be able to get discounted rates.
Whether it is office supplies, or the supplies you need to create your product, you’ll want an expense category for supplies. In your accounting software you’ll likely break this category down further so you can include supplies that go directly into creating your product in your cost of goods sold.
If you budget for anything, you must budget for taxes. Failing to pay taxes is expensive and the last thing you want is a surprise tax bill. Talk to your accountant or CPA to understand what your business’ tax bill may look like.
Remember, if you operate your business as a sole proprietorship, or LLC (not taxed as a corporation), profits from your business flow generally flow through to your personal income tax return. You’ll want to make sure you’ve paid adequate estimated taxes throughout the year, and budgeted for any additional personal taxes you may owe.
Virtually every business today spends money on technology, including computers, company cell phones, printers, software, website hosting, POS systems (to accept credit cards), accounting software, and more. These all require an initial investment along with ongoing costs for subscriptions, maintenance and upgrades down the line. Software expenses can get more expensive as your business expands.
Travel & Entertainment
Business travel, whether it’s local or international, can get expensive. That’s why a travel expense account is important. Keeping track of the money spent on flights, rental cars, meals, hotels, and other travel expenses is a good practice for any business.
Similarly, business meals and entertainment expenses may be tax deductible business expenses if they qualify. Make sure you also keep copies of receipts for these types of expenses if you plan to take a tax deduction.
Best Business Budgeting Software
There are a variety of tools you can use to create a budget for your business. Here are five popular business budgeting programs:
Quickbooks is a leading accounting software, and it offers tools for budgeting and cash flow planning. Not all plans include this feature, but if yours does, you can create a new budget or import an existing one. Even if you don’t use your accounting software for a budget, the information about what you have spent in the past will be helpful for future planning.
Sage Accounting for small businesses offers more than just a simple way to stay on top of bookkeeping and prepare for tax time. It also offers tools to help businesses forecast cash flow.
LivePlan is business planning software that can help you create a detailed business plan including robust financial forecasts. This can be especially helpful for startups and new businesses trying to project plans. It’s also helpful for established businesses trying to get small business loans or investment funding.
MoneyGrit Business is money management software designed to help your business create a spending plan and financial goals for your business, track your actual expenses, and adjust your plan as needed. It’s designed to help you save for periodic expenses as well as set aside funds for a safety net and a fulfilling salary as a business owner.
With PlanGuru, your business can Import data from accounting software programs such as Quickbooks, Xero and Excel. Use that data to create forecasts and a budget for up to ten years. Your business can create a simple high-level small business budget or a detailed multi-department operating budget with consolidations.