8 Budgeting Tips for Starting a Micro Business

There are nearly as many reasons for starting a micro business as there are micro-entrepreneurs. Stay-home parents may want to supplement the main breadwinner's earnings, students may want to earn pocket money, or the office worker may want to pursue a long-term passion. Preparing financially before starting a micro business can make the difference between success and failure, and budgeting carefully has to be part of the process from inception throughout the lifetime of your micro business.

To help your business thrive, you need to stay on top of your financials, and budgeting is the key to doing that. Whether your goal is obtaining a business loan, attracting investors, hiring employees, or opening a branch location, budgeting is imperative for making the most of your micro business. Here are 8 short- and long-term tips for micro business budgeting.

1. Pay Off as Much Debt as Possible

Before you start your micro business, try to be as close to debt-free as possible. Pay off credit cards and other high-interest revolving debt, and pay off other debts (like car loans) if possible. Start an emergency fund if you don't have one and shoot for three to six months' worth of living expenses set aside. A $1,000 emergency fund should be considered essential, because you don't want to be caught with an unexpected medical or car repair bill while starting your business.

2. Assess Your Income Needs

Naturally, you want to make a lot of money, but run some numbers to get an idea of how much you need to make. For example, if your micro business involves making a product, calculate the cost of your supplies versus how much you can reasonably expect to charge for your products. It's also a good idea to speak with a tax specialist so you can understand your tax obligations with your new business.

3. Keep Your Day Job (at Least at First)

Starting your micro business on the side is smart. You may need to keep your regular job for a few months to a few years before your business is successful enough for you to quit. Between your regular work and your new venture, you'll be busy, but remind yourself that you're building a dream, step by step, and that eventually you will have the freedom of being your own boss.

Next step: Sign up for Mint and get free budgeting tools and tips.

4. Set Goals

Keeping one or more side jobs while building your micro business is smart, but eventually you'll probably want to shed those jobs to devote your attention to your business. When budgeting, assess how much you make from your side jobs and how much you need to make from your business to replace that income if you quit. Smart budgeting and goal setting are keys to experiencing the exhilaration that comes from quitting that last sideline job and fully committing to your business.

5. Manage Cash Flow Over the Long Term

An important part of budgeting for a micro business is understanding cash flow patterns. You need to know how long it takes to collect from clients (and adjust billing policies if necessary), and when you experience periods of low cash flow. Identifying cash flow gaps is the first step toward closing them.

6. Revisit and Reassess

After a few months, revisit the budget for your micro business. Budgeting should change over time to reflect changing reality. Adjusting the numbers as necessary gives you a truer picture of your business and your income. If you made budgeting forecasts, revisit them and see how close you were to those targets so you can fine-tune your forecasts going forward.

7. Question All Expenses

After running your micro business for a while, look at expenses. One of the most critical steps in budgeting (whether for your business or your household) is knowing where the money goes. Examine all expenses and see which ones may be unnecessary, or where you can save money easily (such as by ordering supplies in bulk online).

8. Remain Flexible

Budgeting is an exercise in discipline, but budgets are not meant to be set in stone. Your needs change as your micro business changes, and your budget is a tool to ensure you meet business goals. Budgeting also helps you see where you can and can't justify departures from your planned spending.

Starting a micro business is exciting and could be the beginning of a very important part of your life. By starting small, budgeting carefully, and monitoring expenses and income meticulously, you increase your chances of succeeding. One of the main reason small businesses don't survive is lack of financial planning. By budgeting carefully from the time the idea for your micro business takes hold, you improve your prospects significantly.

Next step: Sign up for Mint and get free budgeting tools and tips.