Category Archives: Budgeting

When Budgets Break Bad

Recently I was doing a budget for myself and my partner. We each own a small business so I end up doing three budgets. One for our joint expenses, and one each for our businesses.

This gets tricky when we start talking about my partner’s company because he has very unpredictable revenue streams. We try our best, but inevitably we’re guessing for parts of it.

Later in the year when we go to compare our budgets to what actually happened, it’s never “right”. We never end up with numbers that are exactly what we budgeted. Unfortunately this will always be the case, unless we can find an all-seeing crystal ball on ebay or something.

Weird stuff is inevitable

Do you ever look at your budget part way through the year and think, “well this is useless now, I’m not even close to this” or maybe “hmmm well, when I created this budget I didn’t know that was going to happen, soooooo I’m just going to change the budget.”

Stop. Don’t do it. Relax.

Don’t trash or change your budget. It defeats the purpose of the budget in the first place.

Life is weird and unpredictable, which is what makes it interesting. It’s also why our budgets never match exactly what happens in our businesses. The good news is, that’s okay! Yeah, that’s right, it’s okay if your budget doesn’t match your actual numbers. In fact, there’s no way you’re going to get a 100% match.

The point of the budget is to think through our intention for the year, and try to have a guideline for making financial decisions throughout the year. It’s a measuring stick so we know if we’re veering off course. It’s better to course-correct early before it becomes an issue.

There’s another kind of budget?

My partner is not an accountant, he’s a magician. Yup, you read that right, a magician, as in top hats and card tricks (insert joke about creating money from nothing or making me disappear or magically finishing all the housework). We think about money very differently and he really doesn’t love the budgeting process. He enjoys the end result of having the budget (“enjoys” might be over selling it), but the process isn’t his favourite.

It’s tough to keep in mind that this is not a budget of cash moving in and out of the company, it’s a budget for when income and expenses will be incurred. That means when he invoices customers, not when he gets paid, and when he receives bills, not when he pays them.

Wait, what? Why wouldn’t a budget tell me when my money is coming and going from the bank account?

I don’t mean to alarm you, but it’s important you know, there’s more than one kind of budget. I’ll make this clear in a moment.

If you’re not sure what a traditional budget looks like, or how to create a simple one, read this “How to Create a Simple Budget” and then come back.

Welcome back

A traditional budget shows you when sales will be generated and when you expect to incur expenses, not necessarily when you’ll receive or pay out cash for those sales/expenses.

Think about the last sale you made, did you receive the cash immediately? Maybe, but it probably wasn’t until the next month.

That means you’ll have a sale in this month, but you won’t receive the cash until next month. That’s a problem when you need to pay for expenses in the current month.

What if you put most of your expenses on your credit card? The expenses shown in this month wouldn’t be paid out of your bank account until next month. You probably can’t pay everything with a credit card though, things like rent and utilities usually need to be paid in cash directly out of your bank account.

So you can see how there’s a lot of situations where your cash movement doesn’t always line up with your income statement. Some expenses get paid this month, some next month, some cash is received from sales generated last month and some from this month. This is why it feels like sometimes your budget isn’t in sync with your business.

A cash budget

The solution is to create a cash budget.
I start by creating the budget I outlined in the other article. I create a copy so I can change things without messing with the original (it’s still useful).

In my business, I offer a monthly subscription service, so I know some of my revenue will be paid on the first of the month, I put that in to each month.
That’s cash I know I’ll receive every month.

Next I look at my expenses. Which items need to be paid in cash during the month? Rent, utilities, my coach’s fee – they all stay where they are because when I’m billed is when I have to pay cash for them.

I know many of my business purchases will go on my credit card, so that means on my cash budget, I’m actually paying for them in the following month when I pay the bill.

Go through each line of your budget moving the amounts around to when you know the cash will be coming in or going out of your bank account.

This is a simple cash budget and it will be far more useful in planning payments to suppliers and receipts from customers than the first budget was. It will help to ensure you have cash in the bank when you need it.

Remember, you’re going to have discrepancies between your budget and your actual cash movement, and that’s okay! If you have a big difference, make a note as to what happened so you have a reference for when you go to do your budget next year.

Like with anything it gets easier as you do it, so keep at it. Check back regularly and make sure you’re staying true to your intentions for the year, or you make a deliberate and thoughtful change.

If you’d like a hand with your budget I’d be happy to help you. You can fill out a contact form:

Happy budgeting!


How to Create a Simple Budget

Budgeting is something we don’t do enough of as small business owners. I think we either don’t have the data to be able to forecast next week, never mind next year, or we just don’t see the value in it.

Creating a budget is one of those things that’s important but not urgent, which makes it a tough sell for busy small business owners. We spend so much time putting out fires, trying to get the urgent things done, that it can be tricky to make space in our schedules for important but not urgent tasks.

If you set aside 30 mins this week to make a budget for the next twelve months, I promise it will help you to make better financial decisions.

Why do we budget?

Doing business without a budget is like going on a cross-country road trip without a map. You’re never sure when the next small town is going to come along. Sometimes that’s ok because you just put gas in the car, and sometimes that’s bad because you’re driving on fumes and you really need a bathroom.

Having a budget will allow you to plan for the future, to have a good idea of when your income will be generated and when your expenses will be incurred. With a plan, you can be a more agile business owner because you can react to the environment you’re in and know you’ll be ok.

You can make decisions based on facts and stop guessing – you’ll have a much better view of the future for your business.

It also allows you to save money for bigger purchases and to invest in the growth of your company. If you’re never able to invest in your company, whether it’s better equipment, spending more on advertising or being able to outsource, you’ll find that at some point you just can’t make any more progress.

Creating a budget can shed some light on you’re current spending. It might feel like you only spend a few dollars per month on sandwiches or apps, but it might actually be a few hundred. You can’t change what you don’t know, and often our feelings about money are very different from the facts.

Five Steps to a Simple Budget

Budgeting sucks, I get it. It’s like taking cough syrup or something. It tastes awful but it’s going to help our business get better.

Let’s try to get it done as fast as possible, because the sooner we have a budget, the sooner we can use it to guide our strategic decisions (I’ll explain this later).

Step One: How do you spend money?

Start by writing out a list of all the things you spend money on. Write down everything, even the really small stuff that seems insignificant.

If this is your first year in business, write out what you know you’ll spend money on and what you think you might spend money on. Try to keep it within the realm of “fairly likely” and don’t get to far into “maybe”. You want the budget to be as accurate as possible, and if you put too many uncertain expenses in, it’s unlikely the end result will be a true representation of what it will take to run the company over the next year.

If you’ve been in business a little while, pull out your income statement from last year. This will be super useful in creating this year’s budget because you can use what happened last year to help you estimate this year.

Step Two: How much do you spend?

The next step is to write down how much you spend on each thing every month. Maybe start a spreadsheet or create a table in notebook or something. I recommend creating columns for every month plus the total. Budgeting monthly will give you a more accurate picture than trying to budget for the year and then dividing by twelve.

Here’s an example:











































Office supplies














In the example, I only get billed for water every two months, and I know I’m going to need printer ink in April (because tax season), so I increased my office supplies expense by the amount of printer ink. I also know it gets slower in the summer, so I probably won’t need to buy office supplies again until the fall.

Keep going until you have everything you spend money on and how much you spend on it. Use your income statement from last year to help you.

Try to research anything you don’t know so you can get the best number possible, but don’t stress about it.

In the end a budget is just an educated guess anyways.

Some costs will be difficult to estimate at this point because they’re directly related to sales. Like if you take credit cards, your transaction fees are directly related to the dollar amount processed. Just leave those for now.

Step Three: How do you make money?

Just like we did with expenses, list the ways in which you make money. For example, if you’re a gym owner, maybe some people pay you a monthly subscription fee. Maybe you also sell personal training packages, and nutrition supplements. List all of these things. If you’re not sure if you should list it, ask yourself if you would include it in any other category you’ve already got. If the answer is no, write it down. If the answer is yes, include it with the other item.

Step Four: How much money do you make?

Create a table similar to the one above, but this time for the thing(s) you make money from. How much do you expect to make every month? If you have your income statement from last year, I would use it to put in the months for this year. Then change whatever you know will be different. Maybe you signed a new client so this Jan will be higher than last Jan, or maybe a contract will be ending in March so April will be lower than last April.

If you’re new to business, you can leave these blank or take your best guess. I encourage you to only put in a number if it’s fairly certain. You’re better off projecting revenue that’s too low, than too high.

Step Five: Costs Related to Sales

Now that you have your sales numbers in place, you can calculate the expenses that are based on sales, like transaction fees, subcontractor expenses and other direct costs.

When you’re all done, the table should look something like this:

  Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Total
Sales $250 $250 $400 $600 $300 $250 $150 $150 $250 $300 $400 $300 $3,600
Telephone $65 $65 $65 $65 $65 $65 $65 $65 $65 $65 $65 $65 $780
Water $50   $50   $50   $50   $50   $50   $300
Office supplies $10 $10 $10 $75 $10         $10 $10 $10 $145
Transaction Fees $8 $8 $12 $18 $9 $8 $5 $5 $8 $9 $12 $9 $108
Total Expenses $133 $83 $137 $158 $134 $73 $120 $70 $123 $84 $137 $84 $1,333
Earnings before tax $118 $168 $263 $442 $166 $178 $31 $81 $128 $216 $263 $216 $2,267
Taxes (~15%) $18 $25 $39 $66 $25 $27 $5 $12 $19 $32 $39 $32 $339
Net Earnings $100 $143 $224 $376 $141 $151 $26 $69 $109 $184 $224 $184 $1,928

You’ll probably have more expenses and maybe more sales lines, but the format should be similar. I’ve estimated the income taxes at about 15%, but you should use your tax rate. It’s important to include taxes because otherwise they end up feeling like a surprise at the end of the year. Budgeting for income taxes will give you an idea of how much you need to save every month.

It’s done now, but what do I do with it?

Now that you’ve finished your budget, have a look at the year. Does it look the way you though it would?

Keep comparing your budget to your bookkeeping every quarter (or preferably every month). It’s important to understand where you’re going over budget and where you’re under budget. The sooner you recognize you’re straying from your intended course, the easier it is to make adjustments and avoid surprises.

Comparing the budget to your actual bookkeeping will help you find out where your financial strategy is missing the mark and how you can create a more accurate budget for next year.

If you’d like a hand with your budget I’d be happy to help you. You can fill out a contact form:


P.S. Today we created a simple and straightforward budget. We’ve really just scratched the surface of budgets, have a look at “When Budgets Break Bad” for some insights on how budgets can go sideways and what to do about it.