Budgets are essential to manage your costs and keep your small business profitable throughout the year. Due to the dynamic nature of any small business, you can’t just set a budget in January and let it sit unchanged until the end of the year. Every month, take stock of your business’ performance and expenses and use that data from the prior month to update your budget.
Your monthly budget needs to provide you with enough detail so that you can identify potential cash crunches in the near future as well as opportunities to make the most out of extra cash. To get that level of detail, let’s review seven key small business expenses to account for in your monthly budget.
1. Vehicle Expenses
With the tax deadline rapidly approaching, you may now know that you’ll be able to deduct vehicle expenses for business purposes. Go beyond just the number of dollars spent for gas and include applicable vehicle registration fees, repairs, and insurance payments. Also, keep track of business miles driven because you can deduct 53.5 cents per mile in 2017. For more details, consult Topic 510 from the IRS.
2. Advertising Expenses
Depending on your marketing budget and number of promotion projects that you have going on, you could be eating up your ad budget too fast (or even, too slow). Reconciling your monthly payments to advertisers allows you to fine tune your promotion efforts so that you have enough left for those peak periods, such as the summer or December holidays.
3. Tax Payments
Dude, where’s the budget for April? Your tax liability might have taken a big bite out of it, hurting your available cash on hand to pay suppliers and (gasp!) employees that month. Including all outgoing cash flows is a key part of building a budget for your small business, and tax payments are no exception.
4. Wages
As your small business grows, you’ll find yourself wishing that you could hire an extra help of hands to handle the extra work. But is it worth to have full-time staff throughout the entire year? By keeping track of wages every month, you’ll be able to determine if you could be better served by part-time, seasonal, or contract workers on specific months. Plus, it helps you to be ready for Form 941 every quarter and its equivalent at the state level, if applicable.
5. Expenses Related to Accounts Receivable
Your budget may have a category tracking one-time (or unusual) expenses. From that list, single out any charges for collecting money for sales made on credit, or write-offs from money that’s never recovered. Such charges will tell you the whole story about your sales numbers and whether or not you need to make changes to your policies for sales made on credit.
6. Cash Outflows from Operating Activities
When doing a cash flow analysis, you want to break down cash inflows and outflows into operating, financing, and investment activities. Get in the habit of reconciling your cash flow balance by adding and subtracting applicable inflows, such as depreciation and decrease in inventory, and outflows from operating activities, such as increase in accounts receivable and decrease in accounts payable, and you’ll have an indicator of potential cash crunches or opportunities for investment.
A number that’s too low for many months would indicate that you should start looking into forms of business financing and one that’s too high for many months would point out that your small business could afford to invest in a new piece of equipment, hire a new employee, or spend a bit more in promotion.
7. Loan Advances
If you have an existing term loan or line of working capital, write down how much you have used on the previous month. This allows you to evaluate your existing form of financing: Are you tapping into your line of credit only during certain months? Do you have adequate reserves for an emergency? Do you need to increase your limit?
As you can see, monitoring your business expenses is a great financial habit that allows you to make more informed decisions and reach your business goals. Depending on the size of your small business, hiring a bookkeeper to maintain your monthly budget and other financial documents, such as income statement and balance sheet, will free up your time and enable you to focus on the core activities of your operation.
