Keep Your Business Afloat With These Budgeting Methods
“Money moves from those who do not manage it to those who do.”
This quote from financial guru Dave Ramsey perfectly highlights the importance of being intentional when dealing with finances.
This includes categorizing expenses, building an emergency fund, and prioritizing profit above all else.
In this article, we’ll cover 3 budgeting methods to help you improve your budget management.?
*This article is an abridged, adapted version of the blog post originally published on the Clockify blog: https://clockify.me/blog/business/budgeting-methods/ ?
#1: Curb overspending habits with the Envelope Method
The idea behind the Envelope Method is to divide expenses into categories and put a fixed amount of money for each category into separate envelopes.
Now, given the income businesses typically generate, withdrawing cash each month and using physical envelopes isn’t practical.
Instead, use a digital envelope system, such as a budgeting app, or simply create separate accounts.
The illustration below shows how you can categorize expenses to implement the Envelope Method.
Categorizing expenses gives you a clear overview of your spending and highlights the largest costs. This allows you to adjust spending habits if needed.
#2: Secure earnings with the Profit First Budget Method
As the name suggests, the Profit First Method advises setting aside profit before anything else. The remaining income is then allocated to cover other expenses.
This method takes into account some behavioral psychology principles — like Parkinson's law . Parkinson’s law states that “work expands so as to fill the time available for its completion.”
Parkinson expanded on this theory by devising another law, this time focusing on finances. According to Parkinson’s second law, “expenditure rises to meet income.”
Therefore, the Profit First Method helps you avoid spending all the money you have at your disposal on non-essential business expenses and ensures profit.
This method is represented by the following formula:
Sales – Profit = Expenses
To implement this method, we recommend having separate accounts — one for profit and the rest for other expenses.
Allocating a predetermined amount to the Profit account before paying for any expenses helps you manage income more efficiently. This approach encourages you to be mindful of where the money is going and cut unnecessary costs.
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#3: Focus on savings with the Proportional Budgeting Method
In 2020, 43% of businesses surveyed by Clutch stayed within the budget, while 35% exceeded it.
To avoid a financial crisis when expenses grow unexpectedly — build an emergency fund.
And that’s where the Proportional Budgeting Method can help.
This method involves dividing the income into categories and assigning a specific percentage to each.
A common example of the Proportional Method is the 50/30/20 Rule. You can see the categories based on this rule in the image below:
In this case, necessities make up 50%. These are all non-negotiable expenses, such as:
?? Salaries,
?? Utilities, and
?? Equipment.
Wants can include travel, marketing, office improvement, and any other costs that aren’t essential for your business to run but contribute to its development. For these expenses, 30% is optimal.
The final 20% should go toward your savings.
Of course, you can adjust the percentages to match your business needs.
Setting predetermined percentages for each category makes it easier to build a sufficient emergency fund.
Stay on top of your budget with Clockify
As you can see, many budgeting methods require you to sort your expenses in some way.
You can use time and expense tracking software like Clockify to categorize your expenses. Our app allows you and your team to add expenses, define their type, and even attach receipts. Furthermore, you can approve or reject your team’s expenses.
Apart from that, you can also view Expense reports . This way, you have access to all expenses to make sure you don’t overspend in any category.
Armed with efficient budgeting methods and an expense tracker — you’ll be on the right track to reach your financial goals.