Budgeting 101
Now that you are charging what you’re worth (last month’s blog), it’s time to discuss what to do with all of that money! A budget is an essential tool for any successful business. Ben Franklin said,
“If you fail to plan, you plan to fail.”
What is a Budget?
As a teaching artist and studio owner striving to learn the ropes of running a small business, I find it particularly challenging when faced with financial obligations such as creating a budget. But it is a task that must be done and the simpler I can keep it, the better! So, what is a budget? The website, investopedia.com, defines budget as “an estimation of the revenue and expenses over a specified future period of time.” A budget can be prepared weekly, monthly, quarterly, or yearly. An important reason to have a budget is to maintain control over expenses and avoid overspending. On the other hand, a business must spend money to make money. A budget provides a tool for organizing cash flow and planning for the future. Learning what you have to grow the business and compete is another function of a budget.
In my research, I found that there two types of budgets: a static or fixed budget and a flexible budget. The static budget is simpler because it projects established levels of fixed income and expenses over a set period of time. It works best for businesses that expect income and expenses to be stable. A flexible budget is one that takes into account varying levels of income and expenses. A static budget can be used prior to the start of a budgeting period. The flexible budget helps in evaluating performance and can be adjusted as needed when income and cost fluctuate.
One of the reasons I have had difficulty in budgeting is due to a constantly changing income, both positively and negatively. For example, last year enrollement was down. Currently, I am grateful that the studio schedule is full, with a waiting list! In order to get control over my studio finances, I had to develop a budget that works for me in my unique, non-traditional business. Flexibility was crucial, but it was also important to have a starting point.
Avoid Financial Disaster, Be Financially Responsible! Create a Budget Today
Step 1: Create a spreadsheet with the following headers: Category, Budget Amount, Actual Amount and Difference. I found a simple worksheet at about.com.
Step 2: Calculate Income. (You can use studio helper to help with this!) The experts recommend making conservative estimates when forecasting income.
Step 3: Calculate Expenses (Again, studio helper comes in handy.) Expenses include accounting services, advertising, insurance, professional fees, travel costs, piano tuning, office expenses, payroll and payroll taxes, equipment, to name a few. Experts suggest it is best to overestimate your expeneses.
Step 4: Budget in a Cash Emergency Fund. Set aside at least 10 percent of monthly gross income and deposit it in a money market account. This is crucial for small business owners. If there is a downturn in the economy or an unexpected expense come up, this “rainy day” account will keep your business afloat. A small business should always operate with a positive cash flow.
Step 5: Review your budget every month. Here is where flexibility comes in. Since it is difficult to project expected income in my studio, going over the budget every month is essential. Things to look for are how close you came to forecasting revenue. If revenue was lower than expenses, it’s time to look for places to cut costs. Also, determine where you went over and under your planned expenses.
Finally, I found that 50 percent of my gross income went to expenses. I am curious if that is typical for other studio owners. Also, since I am a novice to small business ownership, I welcome any suggestions on budgeting. How do you budget in your small business? What do you use to assist in building a budget for your studio? Are there any additional programs that you find helpful?
The budget is done – it’s time to practice!
