Your Budget In Detail
Your budget is core to your personal and professional life. Does your business earn enough to pay you a salary? Is your personal account funding your business? Personal and business budgets are convoluted, in fact the government encourages us to convolute them. You may put your cell phone and car in your personal budget to minimize taxes but that doesn't give you an accurate budget to pull from nor clearly understand what expense belongs where. If you're like most small business owners there are lots of small, moving parts that include 15-20 expenses you need to keep track of in your business, which don't include your personal budget. Most of us don't have a natural knack for numbers, budgets, and keeping accurate accounting spreadsheets. Small business owners get into business because they love the people they serve and/or the product or service they offer, not because they love business.
How to "Unconfuse" Your Budget
Understand that you have a personal budget and a professional/business budget. Your personal budget contains line items such as your car expenses, rent/mortgage, cell phone, etc. If your cell phone is for personal and professional use, you can determine whether it should be in your business budget by asking yourself, if I canceled my cell phone plan today, would my business be affected or would my personal life? If only your business would be affected, then your cell phone belongs in your business budget as a business expense. The same thing can be said of your car, if your business closed would you give up your car? How much gas is a business expense because your job requires you to drive to clients?
What's the cost of not clarifying your expenses? Confusion. When the lines aren't clear between personal and professional budgets you feel like a failure and your experience worry and anxiousness. Those feelings may not actually have factual data to prove a need to worry, but that feeling, caused by confusion, can still make you feel like your business isn't successful.
People use their sense of anxiety to keep their spending under control.
When people don't know how to manage their finances or fix their problems they rely on their anxiety to tell them their problems and minimize their spending. Instead of having a cushion in our bank (working capital) we spend down to zero and our anxiety rises and our spending changes in relationship to our anxiety, which is why we use our anxiety as a form of control and spending. Our value systems change because of the anxiety and then we stop taking our friends out to dinner, or stop spending. You spend the first part of the month feeling flush; you pay bills, you treat yourself and your family, and then your bank account drains, you cut back your spending, and then it repeats. You spend two weeks in enjoyment and two weeks stressed because you use anxiety as the indicator instead of using the working capital system.
Rather than confusion or convolution from the IRS or anxiety, let's get some mastery over the numbers. The first thing I want you to do is start tracking, for 3 months, all your personal and business expenses.
Categorize each piece of data. Business expenses include:
- rent
- utilities
- phone/internet
- equipment rental or loan
- worker's comp and liability insurance
- cleaning fees
- general maintenance fees
- storage or invetory control fees
- POS equipment
- software
- general office supplies and expenses
- debt or loans
- postal expenses
- bookkeeper
- refunds
- taxes
- bank or merchant fees
- travel expenses
- consultants
- ingredients
- wages
- supplies
- marketing/ sales/ advertising
Personal expenses:
- rent/mortgage
- phone
- utilities
- car and car insurance
- gas
- travel
- entertainment
- dining
- household expenses
- groceries
- kids schooling or caregiver
- personal care
- hobbies
I take an Excel spreadsheet and under each category I write in the specific item, for example, under personal care I'd write down my haircut and manicure and how much I spent on those. WHen you have the total for each of those three months, write down the average amount you spend per month.
Once you've completed breaking the budget down into categories with totals, I want you to start defining for yourself what is a fixed expense and what's a variable expense. A fixed expense is something you've already committed to, like your cell phone plan or your rent unless you change plans or move. Your variables are things that change from month to month, expenses like gas, dining, and advertising.
Your fixed expenses is a hard number that you can base your budget around because it doesn't move. If your personal budget is $2,800 but $2,000 is spent on your fixed expenses monthly. You have $800 left to work with each month for the variables. Mandatory expenses include your rent, utilities, WiFi, and discretionary expenses include clothes shopping, eating out, or buying items like books or shampoo. Breaking things down allows you to assess your budget.
Fixed budget is the hard expenses, the core budget is the mandatory expenses; the first place you can make cuts is in the area of non-mandatory. If you cut things in the non-mandatory but fixed you can do things like reduce the features or addons to your service. Non-mandatory variable is the area where I see people make cuts and stick to them for a few months and then slipping back into old habits.
Figure out the places you spend the most amount of money and leverage your budget cuts. When you understand where your money is going you gain greater control over your budget. Once you've made the list by percentage and rankings you have a clear picture of your value statement. Does where you spend your money fit your value system? Are you buying or spending just to look or feel good?
To maintenance this going forward, create a tracking system and spending plan. When you track your spending you make the choice to defer your spending instead of using your anxiety and low bank account to make decisions. If you consciously set your spending based on how much you actually earn, all the extra spending you do because you feel good or the cutting back you do because you feel bad, ends.
As an entrepreneur, you will be able to answer the question, Does my business earn enough money to cover my business expenses? With a budget and expenses tracked you can watch the cash flow into your business, pay your bills with it, and pay yourself a salary!