Expand your business beyond the dining room table with the coaching of Grow Your Handmade Business (Storey Publishing 2012). Author Kari Chapin shows you the nuts and bolts of starting a business, from mapping a business plan to addressing legal issues. In this excerpt from chapter 16, “Budgets and Budgeting,” learn how creating a budget can help control spending and keep your business out of the red.
You can purchase this book from the MOTHER EARTH NEWS store: Grow Your Handmade Business.
Money is such a deep and complicated subject. We could talk about it all day long and still not cover every aspect of it. Hopefully by now you have a clearer understanding about why your money is so very important. And because it is so important, let’s talk about something we all need, both personally and professionally, but is still a touchy subject: budgeting. Creating a budget can be easy and even fun — it’s actually sticking to the budget that can be a challenge.
First of All, What Exactly Is a Budget?
A budget is simply a guideline for the money you want to spend to make something happen. That something can be a new line of evening handbags or a new service you want to sell to clients or even any old project, like redoing your workspace. To devise a budget, you can either start with how much money you have to invest in the project at hand, or you can make a wish list of what you would ideally like for your project, and then see if that fits in with the monies you have available. Make sense? Good. So let’s talk about some specific budgets you’ll need to create and possibly include in your business plan.
Creating a Budget: Start-Up Budget
Let’s face it, starting a business takes money, and when you’re spending lots of money, it’s very easy to go overboard. That’s why having a start-up budget is essential. Before you spend a dime, make a list of what you absolutely need for your business and compare that with what money you have. Then, when you begin your buying spree, it will be easier to resist the temptation to buy a lot of extras that you may want but really don’t need. (See Image Gallery for a basic example of a start-up budget.)
First, we enter the amount of money we’re starting off with in the upper-right corner. For this example, we had $3,000. Then, as we plan our spending, enter the item, what it’s used for, and the cost. The next column is a running total of the amount we’re spending, which is a good thing to know. The amount-left column is a simple formula that subtracts the cost of each item from the total amount of money we have, then keeps on subtracting to create a running total of how much we have left.
Before I go further, let me explain why I put the dollar amounts of our expenses in parentheses. Most spreadsheet programs let you highlight a cell (each little box on a spreadsheet is called a cell) or a group of cells, right click, format the cell, and tell it what type of number you want. I clicked on Currency with two decimal points (if you don’t have any decimal points, it’ll probably round up to the nearest dollar, which isn’t the best if you’re trying to closely keep track of your money), and chose the option with the number in parentheses. In the world of accounting, parentheses mean a negative number. You might also record these negative numbers in red. You’ve probably heard the expression “in the red.” Red numbers also indicate negative amounts. Having those numbers stand out is helpful, so at a quick glance you can identify where your money is going.
As you can see from the above example, we began with $3,000, and by the time we spent our money on supplies, start-up costs, and entrance into a craft fair, we already spent $350 more than we had. This is an excellent reason why you should create a spreadsheet like this before you even spend a dollar. You’re going to have a pretty good idea of what you need when you’re starting out. Just enter what you think the approximate cost for each thing will be so that you can make sure you have enough to cover your expenses. You’ll know to try and save wherever you can to make the money last. If it turns out you have extra money, hooray! The bottom line is that by taking a few minutes to enter your potential expenses into a spreadsheet like this, you’ll know if you can do it before you even start.
Creating a Budget: Monthly Budget
Having a budget will help you restrain your expenses. Like a checkbook, this will help you keep track of your expenses. A budget shows your money (expenses and revenue) over a specific period of time. The following example is for a commercial photographer for the month of July. Each time we have an expense or revenue, we enter it into the spreadsheet. It has columns for the date of the transaction, what the item was, a detailed description, the amount (positive or negative), and a running total of how much money we have left. Take a look at the sample spreadsheet (see Image Gallery).
For the first of the month, we’ve had a few expenses like Internet and rent. In the description I made sure to put what type of transaction it is (bill, revenue, expense, and so on), which will help me know where to put it into my P&L statement. The next column shows the amount, and the last column shows the amount remaining after subtracting it from our running total of on-hand cash.
Looking at the budget, we see the first two lines are expenses for Internet and rent. Then, on July 5, we have some revenue: “B. Jones” booked a photo shoot and prepaid $500. Nice. We then have another bill, for electricity, and then on July 15, we bought some new equipment for the business: a lens and some studio lights. On July 18, more revenue! Then, on July 20, we had a business expense: lunch with a client, who ended up booking a photo shoot and prepaying $600. Unfortunately, three days later we had a setback when “B. Jones” called to cancel her photo shoot. But our cancellation policy states that we keep half the deposit if the client cancels within so many days of the shoot, so we refunded only half of the money she paid us. We ended the month with a few more expenses plus a booking from “D. Cleaver.” So...we started the month with $1,500 in the bank and ended with $1,215. Not bad, considering we spent $800 on a lens and lights, things we wouldn’t normally buy every month.
You could just log onto your bank’s website every day and check your balance there, but with a spreadsheet like this, you can customize it and see a month-at-a-glance transactions for your business.
Read More: Learn more about starting a creative business in How to Get Money to Start a Business.
Excerpted from Grow Your Handmade Business © Kari Chapin, used with permission from Storey Publishing, 2012. Buy this book from our store: Grow Your Handmade Business.