How to Build a Budget for Your Business

How to Build a Budget for Your Business

Nelson Smith |Aug 14, 2019

Let's Get Started

Most people are aware of how to make a personal budget. You tally all your sources of income, and then plan your expenses accordingly. It’s not a very complicated endeavor.

A business budget, though, is much more difficult. Figuring out personal needs and wants are easier than figuring out the same for your business. It becomes more complicated when you try to determine how much a business should invest for the future, and how to weigh this against current needs.

This is an important aspect of a business plan, so let’s take a closer look at how you can build a budget to ensure your business thrives for years to come.

Understanding the Basics

What exactly is a business budget, anyway?

Simply put, a business budget is a blueprint of your business’s finances. Depending on what type of business you’re in, this budget could be very simple or immensely complicated.

Many folks start out with a home-based business. These new ventures are attractive because they don’t need much in start-up capital, nor do they require big operating expenses. Some of these businesses don’t cost their owners a nickel in start-up costs.

The one problem is these home-based businesses don’t tend to scale very well. You’re limited to your own output, which means upside is limited. To really achieve growth, a business owner will need to expand to a new location, hire employees, advertise and incur other expenses. This is when things get much more complicated.

Items to Include in a Business Budget

The first step toward establishing a business budget is figuring out how much your revenue will be.

This is easier said than done, especially if you’re planning a brand-new business versus expanding on an existing one. It’s best to be conservative here. Many potential businesses have failed because their owner ran out of money before the concept took off.

One thing business owners struggle with is pricing their product. Many think there’s a viable business opportunity undercutting the competition, but I’d argue against it. Yes, some successful businesses do just that, but many fail trying that strategy, because they underestimate their own expenses.

The next step is looking at expenses. There are two types of expenses: fixed and variable. Fixed expenses are going to be the same every month, while variable expenses will go up and down depending on how much success the business has.

The biggest fixed expense for most businesses is real estate. It usually makes sense for a business to rent its space — at least to begin with — to limit the amount of capital the owners must provide. It’s much cheaper to rent a $1,000 per month space than it is to shell out $200,000 for the same building.

These fixed expenses don’t just stop at rent. You’ll have to pay to keep the lights on, and other utilities like phone and internet access aren’t free either. Any employees you hire will be a fixed expense too. Yes, you can always get rid of staff, but you don’t want to do that after a bad month or two. Firing a qualified staffer should be a last resort, especially after spending money to train them.

Other fixed expenses might include the cost of leasing equipment, payments on any loans the business has, and the cost of raw materials.

Variable expenses including advertising, promotional giveaways, investing in additional training for staff, donations or gifts to various organizations, and anything else that might better belong in the “wants” category rather than the “needs” category.

Once you have an accurate picture of your revenue and expenses, it’s time to put everything together. Remember to build in a healthy profit margin — after all, that’s why you’re in business — or at least a plan to get there if you’re comfortable taking less profit at first.

Finally, don’t forget about start-up costs. You’ll likely have to pay for some machinery, put a security deposit down on a rental property to house the business, buy office furniture and do a bunch of other little things. These costs add up. Make sure there’s ample start-up capital to account for all these expenses, plus extra just in case profitability doesn’t come quickly.

How to Save Money

Much like personal budgeting, having a good business budget is all about the details. Every item in the budget must be scrutinized to really justify the expense.

Say you’re opening a restaurant, and two different locations are available. The first is your dream restaurant, a turn-key operation that can seat 150 patrons. Everything is brand new, but you’re paying $10,000 per month for the location.

Compare that to a much smaller location that’s a little rough around the edges. This location needs a little work to bring out its full potential and can only seat 40 people, but the rent is a mere $1,500 per month.

Every entrepreneur dreams big. They want to own a high-class restaurant, so taking the first option is ideal. But a prudent business owner would start out with the second location, saving money while perfecting their craft. Then, once the concept is proven to work and there’s a bunch of cash in the bank, move to a larger location.

This type of behavior can be applied to other business expenses. Giving out coupons is a cheaper way to market your business versus buying expensive radio or television advertising. A normal business doesn’t need the top of the line internet package. Independent contractors can be hired over full-time employees.

Before authorizing any expense, ask yourself if this will directly add to the bottom line. If the answer is no, then save that money for something that offers a better return on investment.

The Bottom Line

Even opening a small business can be incredibly tough. It requires an entrepreneur to wear many different hats. You must be competent at expense control, marketing, human resources, and a dozen other things, never mind doing the work required by the business itself.

Setting up a good business budget can help take the guesswork out of buying decisions, leaving that mental energy free for other parts of the business; there’s already enough to worry about.

Our Most Valuable advice

5 of the Best Auto Insurance Companies

Eric Bank | August 14, 2019

Protect Against Collisions and More If you drive a car in the United States, liability insurance must cover it. This type of policy pays for medical and property damage resulting from a vehicular accident. You can also purchase comprehensive and collision insurance to cover other costs. These additional coverages help protect the value of your car should it be damaged. If you are calculating how much it will cost to buy a car, you need to take into consideration the cost of insurance as well. In this article, we’ll review the basics of car insurance and the best auto insurance companies in America, including costs, pros and cons. This is a brief introduction to automobile coverage. Liability Coverage When an accident occurs, liability insurance covers you, household members and authorized drivers for the costs associated with property damage and bodily injury. It covers the cost to repair or replace property damage that you caused. [youmaylike] You are also covered if you cause the bodily harm or death to someone else while you are driving the car. This includes medical expenses, loss of income and specified legal defense costs. Collision Insurance If you are involved in a collision, this type of insurance will help pay for repairing or replacing your vehicle. If the collision is your fault, the coverage may extend to other damaged vehicles involved in the accident. States do not mandate that you buy collision insurance, but your lender or car dealer will if you finance or lease the car. Policies offer a range of deductibles, which is how much you’ll have to pay for repairs before the insurance kicks in. Larger deductibles lower the policy premiums but expose you to more out-of-pocket expenses if a collision occurs. Comprehensive Insurance Comprehensive insurance covers damage to your car that occurs for reasons other than a collision, including theft, fire, vandalism, weather and natural disasters. This coverage is often required if you finance your automobile. You can add riders to this insurance to provide coverage of additional costs, including auto towing, glass repair, daily rental while your car is in the shop and emergency roadside service. As with collision insurance, you can set the deductible on your comprehensive insurance policy to cut your premium costs. Gap Insurance If your car is severely damaged in an accident or other incident, you might find that your comprehensive and collision damage won’t provide enough coverage to pay off the amount you owe on the vehicle. Many policies pay only the fair market value of a totaled car, which might be only 80% of the amount you owe. You can buy additional insurance to plug this gap and ensure you can pay off the car loan in full if the vehicle is destroyed or stolen. Normally, car leases require you to buy gap insurance. If you pay cash or pay off your loan, you can save money by avoiding or dropping gap insurance when no longer needed. Top Five Auto Insurers These five insurers all offer full coverage policies and many additional services. Amica Amica is a superstar among car insurers, winning accolades from Consumer Reports and J.D. Powers. It’s known for handling the claims process smoothly. The average annual cost for full coverage: is $1,360. Pros You can have your car repaired at any body shop, without restrictions. Offers a premium package which, for an additional cost, provides full glass coverage, rental coverage, good driving rewards and identity fraud monitoring. Superior financial stability rating from A.M. Best. Cons Missing some discounts, such as military, low-mileage and prepay discounts. Must speak on the phone to get a quote. Sparse website when it comes to customer education. State Farm State Farm is the country’s largest multi-line insurance company. It excels in customer service and regularly garners high marks from customers. The average annual cost for full coverage: is $1,337. Pros Superior financial stability rating from A.M. Best. Excellent online quote tool, getting customers a quote in as little as five minutes. Easy claim handling and top service from its more than 18,000 agents and its easy-to-use mobile app. Cons Doesn’t offer coverage for new car replacements or uninsured motorists. Missing prepayment and automatic payment discounts. The Hartford While only 11th in size, The Hartford is big when it comes to policy options. It offers rates based on your actual driving as well as full replacement of new cars when destroyed shortly after purchase. Average annual cost for full coverage: N/A. Pros Solid benefits, including superior roadside assistance and towing programs. High marks from customers for their purchase experiences. One of the few insurers with mechanical breakdown coverage for out-of-warranty repairs. Cons Mediocre service interaction according to J.D. Power surveys. Sparse online learning materials. Geico Geico is the second-largest U.S. car insurer. It is a favorite among tech-savvy geeks who appreciate the insurer’s mobile app and excellent online service. The average annual cost for full coverage: is $1,627. Pros Geico offers plenty of ways to save, such as multi-vehicle, driving history and vehicle safety equipment discounts. Special savings for active and retired military members and federal employees. Full-featured mobile app for getting quotes, buying insurance, managing your policy, submitting claims, summoning roadside assistance and making payments. Cons Human help may be in short supply, as just about everything is handled online. No gap insurance is offered. USAA No insurer matches USAA for service to military members. Unfortunately, it's only available to active service members, their families and retired veterans. Average annual cost for full coverage: $896. Pros Superior financial stability rating from A.M. Best. Top-ranked purchase experience score from J.D. Power. Cons Missing gap coverage. Doesn’t offer interior vehicle coverage or new car replacement coverage. Limited availability. The Right One for You Competition in the insurance industry helps drive down prices and prompts insurers to offer money-saving features. For example, your carrier might reward you for a safe driving record and for having a long-term relationship with the insurer. The right insurer for you is highly rated for service, offers the exact coverage you want and does so at an unbeatable price. You should always gather multiple quotes before selecting an insurer, and make sure you get credit for all applicable discounts.

Everything You Need to Know About Filing Your Own Taxes

Katie Macomb | August 14, 2019

It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.