Budgeting, budgeting, budgeting! We’ve all heard about the importance of budgeting before, but many still overlook this crucial money managing practice when it comes to their personal and business finances.
Budgeting can look different depending on the area of focus. Your personal household budget vs your business budget will prioritize different things. However, at the core, there are also many similarities and the mechanics are the same.
When you create a budget, you are planning your incoming and outgoing expenses. This core practice is the same for both personal and business budgets.
Businesses and households that thrive know how to manage their money and keep their expenses in check. By implementing these money managing strategies into your life, you too can thrive and prosper in both business and life.
Creating a personal spending plan
Often, budgeting begins in response to a financial crisis, however, ideally, budgeting is proactive, not reactive. Instead of being about damage control, it can be about monthly progress and strategic financial planning.
By creating a personal budget, you and your household can better plan your spending and save for future emergencies or unexpected expenses.
Budgeting also includes planning for major purchases. By creating a plan for purchasing big-ticket items, there is less potential for financial surprise and unexpected costs down the line.
Entrepreneur, international speaker, best-selling author, licensed CPA, and a Chartered Global Management Accountant, Sharon Lechter shares key budgeting tips on her blog. Below are her tips to establish a solid personal budget, or as she prefers to call it– a personal spending plan.
A personal budget should include the following steps:
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- Establish your objectives (financial, lifestyle, etc.)
- List all of your income sources (wages, investments, spousal support etc.)
- Identify and list all expense categories (housing, auto, groceries, etc), broken into fixed vs. variable
- Assign amounts to each spending category
- Allocate savings
- Account for fluctuations or one-time events
- Track your progress and make adjustments if necessary
Managing your business budget
Business budgeting follows the same basic principles as personal budgeting, with a few additions. An accurate business budget will help you ensure your business has enough revenue to stay in business and continue to grow, while also giving you an in-depth window into how the business is performing and what to anticipate in the future.
Again, Sharon shares her expertise, laying out the core components to include in a basic business budget.
Your business budget should include the following:
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- Your sales and revenue
- Fixed costs (such as rent) and variable costs (raw materials that vary in price)
- Debt service
- Account for fluctuations or one-time events
- Track your progress and make adjustments if necessary
One major difference between business and personal budgets is that in a business budget, forecasting is more crucial. For most people, predicting one’s monthly income is usually simple as income is fairly consistent from month to month. However, in a business, one must pay closer attention to their revenue forecast to plan for the months ahead.
In a previous post on Latinas in Business, financial service and leadership expert Jesse Torres advised that business owners should sit down to thoughtfully estimate expected cash inflows and outflows.
“Factors that to consider include the sales cycle, terms and discounts provided to customers, industry delinquency rates, and other factors that may affect the timing of incoming cash.
Similarly, it is necessary to estimate expenses and other cash outlays. This includes the timing of the purchase of equipment, raw materials, and supplies. It also includes the schedule for payment of salaries, taxes, and other day-to-day expenses.”
Business owners can utilize financial resources from SCORE, a national nonprofit support group for small business owners. SCORE provides a free budget template that business owners can use to manage their cash flow.
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Budgeting for Unexpected Costs
One area where budgeting really pays off is when you are faced with sudden, unexpected costs. Most of the time, even without budgeting, we tend to know what costs to expect month to month in both our personal and business finances. You know you need to cover your rent, gas, utilities for instance and probably have that money set aside. However, will you be prepared for an unexpected expense such as a car repair?
The SCORE blog offers budgeting resources to anticipate these unexpected costs and allows you to set aside funds to tackle these challenges when they arise. Marketing Content Manager, Lauryn Johnson breaks down the differences for anticipating unexpected costs for both personal and business budgets:
At home: Those who are prepared will have sudden expenses covered by a portion of their budget, usually money set aside specifically for “incidentals.” Others may cover these expenses with their “rainy-day” fund. Either way, those who budget and save will be more likely to successfully navigate an unexpected expense without going into debt. The less prepared may end up having to charge the unexpected expense on credit cards, loans, or other high risk methods.
In business: For most business situations, costs should be considered either fixed or variable. Much like your regularly budgeted personal expenses, fixed costs have to be paid regardless of your profitability each month. Variable costs, however, are where you should have a little more flexibility.
Implementing these budgeting money managing practices in both personal and business finances will help you thrive and prosper in all avenues of life.
