Budgeting Essentials: Components of a Budget
Coach Dan Dollevoet lays out the different components of a standard budget and what they can teach small business owners.
I’ve seen too many business owners jump straight into budgeting without understanding what each number actually means. Without that foundation, even the most ambitious plan can fall apart fast.
Revenue
Revenue is the total money your business brings in before anything is taken out. It’s tempting to inflate this number with optimistic projections, but that’s one of the biggest budgeting mistakes I see.
To make good decisions, you need a clear and honest view of the state of your business.
A budget built on fantasy revenue is just wishful thinking. Get real with your numbers so the rest of your budget can do its job.
Variable Expenses
These are the costs that change based on how much you sell. Your cost of goods sold, materials, labor tied to production, shipping, etc.
When I work with service-based businesses, I always say: if your revenue goes up but your profit doesn’t, look here first. Variable expenses are silent killers, easting away at your margin when you’re not paying attention.
Fixed Costs
These are the costs you’ll have whether you make $1 or $100,000. Rent, insurance, software, admin salaries, etc. They’re the baseline costs of doing business.
Don’t underestimate the importance of knowing your burn rate, which is the fixed costs you need to cover just to keep the lights on.
I once worked with a client whose rent was quietly swallowing their profit. Downsizing their office wasn’t glamorous, but it was the right move. That one decision turned their business around in six months.
Capital Expenses
Capital expenses are the bigger, long-term investments such as equipment, upgrades, and major repairs. They don’t hit your books every month, but when they do, they hit hard.
One of my clients ignored their aging delivery van for too long. When it broke down, they had to replace it overnight, with cash they didn’t have.
A smart budget doesn’t just account for what’s happening now, it plans for what’s coming next. Build in room to prepare for these bigger ticket items, so you’re not caught off guard.
Profit
Once you subtract all of the above from your revenue, you’re left with profit (hopefully not a scary zero).
There are two key profits to track:
- Gross Profit = Revenue – Variable Costs
- Net Profit = Gross Profit – Fixed Costs
I always tell my clients: this is the number that funds your dreams. If your profit isn’t where it needs to be, your budget should help you figure out why, and what you need to do to fix it.
Want help making sense of your numbers? I’m just a message away.
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Dan has 25+ years of experience helping businesses improve and optimize their operations. He combines his financial analysis and planning expertise to solve problems and help clients increase profitability.
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