I worked with many small business owners in the last 20 years, and each and everyone of them failed to put together a budget before they even launched their website. Did you just wince a bit? Did you just think, “it’s me… I didn’t put together a budget either!” For people who want to share their passion with the world, budgeting feels like the homework assignment everyone groans about. BUT this is one step of your passion to action journey that you don’t want to skip. Let’s talk about budget basics and how to get your small business budget started when you don’t know where to begin.
Budget Basics for Beginners
There are so many resources, Tik Toks, Reels, and Pins that walk you through how to set up a personal or business budget, but after watching a few, I thought that a deeper dive is necessary. I think there is a lot to unpack here, so this is part 1 of a 4 part series.
I’ll keep this straightforward, and when you’re done with this series, you will:
- understand basic budget terminology
- create your personal budget
- know how much revenue your business needs to survive and thrive
- identify your business expenses, and what to cut if necessary
- create your business budget
- understand how to project your future earnings and expenses and set goals to keep your business on track
Terms to Know
Let’s do a quick overview of basic terms and commonly used acronyms first.
A/P or Accounts Payable – The expenses you owe to vendors and contractors. The expenses are due in a short amount of time. There are expenses tied directly to your service or product (think inventory, materials, and labor for a specific product), also known as “Cost of Goods Sold”. “Overhead expenses” do not connect to a product or service sold (think rent, benefits, some salary that is not tied to a specific product or service, office supplies, etc.)
A/R or Accounts Receivable – The money people or businesses owe you for good or services they received. Another way to think about A/R is the amount of money needed to balance your open (unpaid) invoices.
Liability – The amount of money owed to someone else. Unlike A/P, these expenses are long-term debts. The best example is a credit card. You make purchases on the credit card, and the amount of money owed to the credit card company is a liability, until you pay expenses and interest back to the company. Taxes owed to the state or IRS are another example of common business liabilities.
Revenue – The total amount of income your company makes through sales or services. This does not account for any business-related expenses paid.
Net Revenue – Your business revenue minus the cost of goods sold, returns, and discounts. This does not account for other business-related expenses, such as overhead expenses.
Profit – The amount of money your business made during a specific period in time, minus all expenses. This is the number that helps define the financial stability and success of your business.
Chart of Accounts – Organizes financial transactions into categories. I love the example used by Nerd Wallet: “Think of it as the filing cabinet for your small business’s accounting system.” For most new and/or small businesses, this will include income or revenue, expenses, liabilities, assets (think of equipment, cars, cash and/or inventory items owned by the company). You might also include equity if you have stocks or earnings that you keep in the company.
Profit and Loss Statement – Also known as your P&L. This is a financial statement that shows all your income and expenses, by account, for a specific period. It shows how well your business can manage A/R, A/P, and generate income to maintain profitability. It also shows if your company is not making enough income to balance the expenses incurred.
Balance Sheet – This is like a cheat sheet to show the financial health of your company. It shows all your assets, liabilities, and equity. Your assets are A/R, equipment, cars, cash, and/or inventory owned by the company. Your liabilities are A/P, long-term liabilities (credit card debt, tax, etc.). Equity is any stock the company holds or retained earnings (the profits held by the company).
Accrual Accounting – This is an accounting method used when you record your income and expense when the transaction occurs, even if you have not received the money or paid the bill yet. This is the most common method of accounting.
Cash Accounting – This is an accounting method used when you record your income and expense, only after you receive the money or pay the invoice. This method does not track your A/P or A/R and is best for small, non-inventory-based businesses.
Reconcile – A common example of reconcile is balancing your checkbook. You want to make sure that you accurately recorded all your transactions and what you recorded matches the bank’s records. When you reconcile accounts, you will balance each transaction until your ending balance is $0.
Budget Basics – FREE Cheat Sheet
Now that you have the basic terms down, be sure to grab your FREE cheat sheet, 9 Budget Terms You Need to Know.
Build Your Personal Budget
In the next article we will:
- create your personal budget
- know how much revenue your business needs to survive and thrive
Budget Basics Workshop
Do you want more of this content, but need help, beyond words on a page (screen, LOL)?
The Budget Basics Workshop is designed just for you!
Learn how to create budget projections, build your budget, and evaluate your performance in just 4 days!
This hybrid workshop offers 4 weekly classes by Zoom, video content to study at your own pace, a personal and business budget template, along with worksheets and cheat sheets to help you along the way.
For a limited time, you can join the live workshop, at a discounted price of just $97!
Take advantage of this limited time offer, before it’s too late!