How to Develop a Business Budget

This article was created from Building Better Business webinar: Business Budgeting 101

Edited by: Dr. Rachel Siditsky, AP, FSOMA Editor

If you are not currently using a budget, whether in your professional or personal life, this could be the perfect time to start. 

Due to current inflation, prices of supplies and gas have increased, which will impact us all both personally and professionally. This could also mean you are seeing fewer patients if they are feeling the financial pinch, which causes a decrease in the funds available to support yourself. 

A budget will help you do more with the money that you currently have. Let’s be honest, when you operate your finances without a budget, there is nothing holding you back from spending beyond your means. You might have a general idea about how much money you can spend each month, but without hard, accurate numbers, it’s easy to lose control of your spending habits. 

Without a budget it is easy to spend money like it’s not a big issue. From going out to eat regularly, to going on vacations, without a budget it’s hard to correlate your daily spending to the income you are generating.  Not budgeting can lead to a potentially less than optimal financial situation. 

For example, going out for lunch one time doesn’t seem like a big deal in the moment. However, when you sit down with a budget and add up the cost of 20 lunches each month with friends or colleagues, those seemingly insignificant bills add up to a lot of spending.  If your monthly income is not able to cover your regular expenses on top of these extra frivolous expenses you will find yourself in a financial bind and adding a lot of extra stress to your life.

Budgeting is important to keep a close eye on your daily spending habits, understand the impact of seemingly small expenses, and take control of your spending.

There are many benefits of creating and monitoring a business budget:

  • It allows you to manage your money effectively & control spending
  • It helps to allocate appropriate resources to projects and prepare for emergencies
  • It allows you to monitor your business’s performance and stay on track
  • It helps to meet your objectives and find financial contentment
  • It improves decision-making and keeps you organized
  • It allows you to identify problems before they occur – such as the need to raise capital or to see cash flow difficulties
  • It helps you plan for the future without feeling financially overwhelmed

A business budget isn’t just busy work. It helps you project annual expenses and lets you see costs as they occur. A budget allows you to project your utility, marketing, rent, wages, and other costs so you can learn the true cost of delivering your service. Once you know this, you can set your prices to make the profit you want. If this price is too high for you to be competitive in your marketplace, you can use your budget to identify areas where you can reduce your costs so that you can reduce your price, or develop other ways to produce revenue.

A budget lets you track your business’s performance throughout the year, allowing you to make necessary changes to control costs or increase spending to take advantage of growth opportunities. If your marketing is effective, a budget will let you know if you have funds available to increase your advertising to grow your sales. If your sales are slow, a budget identifies areas where you can cut discretionary costs to make you more competitive or hold you over during slow periods. Along the same lines of controlling your spending, budgeting is important because it keeps you on track when you are trying to achieve your financial goals.

Setting goals is pretty easy. Anybody can do it. The best way to start is to think of something you want to achieve, and then set a defined timeline to achieve it. But here’s the thing, setting goals and actually achieving your goals are two very different things.

In order to achieve a goal, you need to stick to a plan and stay focused on a clearly defined process; and that’s where having a budget is so important.

Through a budget you can reverse engineer your goals, and develop a clearly defined process to achieve them. In essence, when you create a budget, you are setting boundaries on your financial behavior so that you can stay on track and achieve every goal you set for your life.

Additionally, whenever you sit down to log your expenses into your budget, you are essentially re-committing to your goals. And I can tell you from personal experience that the more often you commune with your goals, and assess your progress, the more likely you are to achieve them.

How do you take that first step in developing your Budget? – Before determining what amount to charge for your services, you will need to develop a budget in order to know what your expenses will be. There are different methods that can be used to develop and track your budget. This can easily be done in an Excel spreadsheet or you can purchase a software such as QuickBooks.  These types of software not only easily handle your expenses, but can be used as a database to store client information, and can also handle invoicing.

Steps to Creating a Budget

Step 1: Determine your Fixed Costs – Your fixed costs are any expenses that stay the same from month to month. These include expenses like rent, internet, telephone, and website hosting. If you are just starting your business, use projected costs.

Step 2: Determine your Variable Expenses – Variable expenses will vary each month based on your business performance and activity. When your profits are higher than expected, you can spend more on the variables that will help your business grow. But when your profits are lower than expected, consider cutting these variable costs until you can get your profits up.

Step 3: Determine On-Time Spends and “Just in Case” Spends – Maybe you have plans to purchase a piece of equipment, pay for licensing, or some other expense that will only take place once. You should be prepared for “rainy days” and emergencies by setting aside money for it.

Step 4: Put it all Together – This creates your projected Profit and Loss Statement. This statement will show you where you may have to cut costs or somehow increase your income.

Step 5: Make sure you track your actual results. This practice will help you set goals about your performance and then see what happens in reality to give you the roadmap of where you need to take your business. Once you start seeing patterns in income and expenses it will be easier to make projections. Write your plan and work it! With time, the practice of projecting and then analyzing your actual performance will help you to see what’s really possible, where you may need to improve, and what weaknesses might exist. Real data helps to make more realistic and attainable goals.

How to Determine What Amount to Charge

One of the trickiest parts of running your own business is deciding how much to charge. If your services are too high, it will be a deterrent for patients. If you ask too little, you risk potential patients thinking you are cheap or inexperienced. PRICE = COSTS + PROFIT MARGIN.

The first step in determining pricing for a service is not only to determine whether you will be charging a flat fee or an hourly rate, but also what your expenses are and how many hours you plan on working or how many patients you anticipate seeing. 

First, do some homework. Research how much your competitors are charging, what they are providing for that cost and also how experienced they are. After researching what local practitioners are charging, try to decide where you want to fall along the spectrum, taking into consideration your skill level, experience, and your reputation. 

Next, determine how much you want or need to make each year, and add this to your overhead. 

Then choose a profit margin. You are entitled to earn a profit over and above your salary and overhead expenses. Profit is the reward you get for taking the risks of being in business for yourself. It helps to provide the cash flow to expand and develop your business. There is no standard profit percentage, but a 10% to 20% profit is common.

For example, if you wish to charge by the hour, there are approximately 2,000 hours in a work year. If you want to earn $40,000 per year, and say your overhead is $30,000:

 $40,000 salary + $30,000 overhead = $70,000 

$70,000 x 10% profit margin = $7,000

$70,000 overhead + $7,000 profit margin = $77,000

$77,000/2,000 hours = $38.50 per hour

Keep in mind though, this would be based on being completely booked on every day each week, which may be next to impossible if just starting out. You may find that about 50% of your time is billable with the other 50% looking for business, managing customers, and taking care of the administration of the business. That means if you still want to make $40,000 per year, you should charge at least $38.50 x 2 = $77 per hour.

If you would rather charge a flat rate, you would take your (overhead + desired salary + profit margin) and divide it by how many patients you believe you will be seeing. As it can be unwieldy to calculate the rate using a yearly client number, divide the total of your overhead, salary and profit margin by 52 weeks to get a weekly cost of overhead, then divide that by the number of patients that you anticipate seeing during a period of 1 week. 

For example, if you want to earn $40,000 per year, and your overhead is $30,000: (40,000 + 30,000 + $7,000 profit)/52 = $1,480 overhead per week. If you anticipate seeing 10 patients during the week, $1,480/10= $148 per session. However, depending on market conditions, you may be able to charge more, or you might have to accept less.

If a flat fee is charged for various services, bundling services together into a package and then providing a discount may encourage patients to purchase the entire package rather than just one service. One approach is to start out charging a fee that is at the lower end of the spectrum for others performing similar services, then gradually increase it until you start meeting price resistance. Over time, you should be able to find a payment method and fee structure that enable you to get enough work while adequately compensating you for your services.

Watch the free webinar on Business Budgeting 101

Master Company Budget PDF

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