How to Budget for Your Business as a Contractor
If you’re a contractor, you know how important it is to have a budget for your business. But creating a budget can be overwhelming, especially if you’re just starting out. In this article, we’ll show you how to create a budget for your business as a contractor, so you can keep track of your finances and make informed decisions.
Step 1: Determine Your Income
When calculating your income, it’s important to take into account all the money you receive from your clients or customers. This includes any fixed or variable fees, retainers, or commission-based payments. It’s also essential to consider any fluctuations in income, especially if you have seasonal work or projects with varying timelines.
One strategy to mitigate fluctuations in income is to have a financial cushion or emergency fund. This fund should be set aside for unexpected expenses or lean periods when your income is lower than usual. Aim to save at least three to six months’ worth of living expenses in this fund.
Step 2: List Your Expenses
Listing your expenses is the next crucial step in creating a budget. Start by identifying all your fixed expenses, such as rent, utilities, phone, and internet bills. Next, list your variable expenses, such as materials, equipment, and transportation costs. Don’t forget to include any expenses related to marketing, advertising, or professional services such as accounting or legal advice.
Once you have your expenses listed, it’s important to review them critically and prioritise them based on their importance to your business. Ask yourself if each expense is essential or if it can be cut or reduced.
Step 3: Categorise Your Expenses
Categorising your expenses helps you better understand where your money is going and identify areas where you can save. It’s common to categorise expenses into broad categories such as “operating expenses,” “overhead costs,” “variable expenses,” or “capital expenditures.”
Another strategy is to use the 50/30/20 rule. This rule suggests allocating 50% of your income to essential expenses such as rent, utilities, and materials; 30% to discretionary expenses such as entertainment and hobbies, and 20% to savings and debt reduction.
Step 4: Create a Budget Spreadsheet
Creating a budget spreadsheet is essential to track your income and expenses accurately. The spreadsheet should include all the categories you identified in step three and should be updated regularly to ensure it remains accurate. Be sure to include formulas that automatically calculate your total income, expenses, and profit.
When creating a spreadsheet, it’s essential to be as detailed as possible. If possible, separate your income and expenses into separate sheets, and add graphs or charts to help you visualise your financial data better.
Step 5: Monitor Your Budget
Monitoring your budget is crucial to ensure that you stay on track and avoid overspending. Review your spreadsheet every month and compare your actual income and expenses to your projected budget. If you notice any discrepancies, investigate the reasons behind them and adjust your budget accordingly.
To avoid overspending, it’s crucial to stick to your budget as closely as possible. If you have trouble keeping to your budget, consider setting up alerts or reminders to help you stay on track.
Step 6: Adjust Your Budget as Needed
Your budget is not set in stone and should be adjusted regularly to reflect changes in your business. For example, if you take on more clients, you may need to increase your marketing budget to attract new business. Similarly, if you decide to upgrade your equipment or hire additional staff, you may need to adjust your budget accordingly.
To make adjustments to your budget, revisit steps one to three and analyse your income and expenses in detail. Be sure to update your spreadsheet regularly to reflect any changes.
Step 7: Seek Professional Help
If you’re having trouble creating or managing your budget, consider seeking professional help. A financial advisor or accountant can help you create a budget that works for your business and provide guidance on how to manage your finances effectively.
Additionally, there are several software programmes and apps available that can help you manage your finances more efficiently. These programmes can automate many of the processes involved in budgeting, such as categorising expenses and generating financial reports. Consider exploring these options to see if they are a good fit for your business.
Should I Hire A Contractor Accountant?
Our specialist team of expert and highly qualified contractor accountants are here to deliver everything you need to set up, operate and grow your business. Operating your own contracting business is highly rewarding, but it can also be financially beneficial to undertake.
However, amongst managing projects, staffing, organising premises and developing your service offering you will also have to deal with the daunting and difficult task of managing your company’s finances. Make running your business easier with MJ Kane & Co Accountants.
Learn more about our Contractor Accountants Service
Creating a budget for your business as a contractor is essential for managing your finances and making informed decisions. By following the steps outlined in this article, you can create a budget that works for your business and helps you achieve your financial goals. Remember to monitor your budget regularly, adjust it as needed, and seek professional help if you need it.
Contractor Accounts FAQs
Do I need to be a financial expert to create a budget for my contracting business?
No, you don’t need to be a financial expert to create a budget. However, it’s essential to understand the basics of accounting and finance to ensure that your budget is accurate and effective.
Can I use a template to create my budget?
Yes, there are many templates available online that can help you create a budget. However, it’s essential to customise the template to reflect the unique needs of your business.
How can I reduce my expenses as a contractor?
There are several strategies you can use to reduce your expenses as a contractor. These include negotiating better prices with suppliers, reducing unnecessary expenses, and optimising your processes to increase efficiency.
How often should I update my budget?
You should update your budget regularly, at least once a month. This ensures that your budget remains accurate and reflects any changes in your business.
Can I use my personal bank account for my business expenses?
No, it’s not recommended to use your personal bank account for your business expenses. Instead, open a separate business bank account to help you track your income and expenses more effectively.