Businesses need budgets.
But how do you go about setting a business budget? What are the main things you need to put in? And what will it tell you?
A budget gives you the knowledge and insight to eliminate wasteful spending and get to profitability faster. A well-planned small business budget will:
- show you how many sales you need to cover costs
- figure out how much money you can reinvest in the business
- find out when you can afford to hire help
When setting a business budget, you need good numbers. Don’t guess at what’s coming in and what’s going out. You could be making assumptions that aren’t true. Take the time to look into your accounts and dig out the real figures. It might sound like hard work but it’s worth it.
Creating a budget sounds complicated and daunting but setting a budget for your small business is easier than you think. Here are 3 simple tips to get you started:
1. Getting started – Your Profit & Loss Statement Report
Your profit and loss report (P&L) tells you at a glance whether you’re making money or not. To do that, you’ll subtract your expenses from your income.
Income (revenue): How much money are you generating from sales of your products or services? It helps to break these into:
- Recurring income: regular and reliable revenue from client retainers and contract work
- Expected income: predictions of future income. This is a forecast of what your business is likely to earn.
- Expenses (costs): How much money are you spending on business costs such as staff, raw materials and marketing? As with income, it helps to break these into:
- Direct costs: any costs incurred directly relating to your sales, this could be services engaged or raw materials.
- Recurring expenditure: your monthly payments for rent, utilities, payroll and so on
- Sundry costs: occasional payments for office supplies, client entertainment expenses and other items
It can be easy to overlook some of the costs of doing business. To help capture them all, consider:
- Depreciation: business assets, such as computers and equipment, lose value as they get older, include your current depreciation and add an estimate of any assets purchased in the year.
- Overheads: make sure you don’t overlook fixed costs such as rent or energy (e.g. electricity, gas, transport fuel)
- Payroll: the total cost of employing your staff – including national insurance, pension and other benefits.
- Loan interest: interest costs of current and/or new business loans or HP agreements
If you have more revenue coming in than costs going out, you’re making a profit, well done. If it’s the other way around, you’re making a loss which is okay in certain situations, but losses aren’t sustainable over the long term.
If you make a profit, think carefully about what to do with it. Could you:
- drive bigger profits by reinvesting in the business?
- save money by paying down debts quicker?
- keep cash in reserve to ride out future revenue dips (this is an especially big consideration for seasonal businesses)?
There are many ways to treat a profit and setting a business budget will help you decide on the right strategy. A financial advisor will help you come up with the most tax-efficient plan.
This tells you what your business is worth. It’s the difference between what you own and what you owe. On the plus side of the balance sheet you’ll find:
- the value of the assets owned by your business, such as work tools or real estate
- cash you have in the bank
- invoices that have been sent to clients but have not yet been paid
All of these are business assets. On the other side of the balance sheet are your liabilities, which include:
- expenses that have been incurred but not yet paid, such as bills from suppliers
- taxes that are due to be paid in the near future
- loans or other business debts that you have
The balance sheet shows your assets minus your liabilities, if it’s positive you’re on the right track!
With all this information at your fingertips, you’re ready to start setting a budget for your business.
2. Creating your first small business budget
Now that you have all your current financial information in black and white, you can create a forward-looking budget. It will tell you how much you:
- spend running the business
- can invest to improve the business
- can pay yourself (and any shareholders)
A budget will also give you a much better idea of what your cash flow will look like. This will help you avoid running out of money and getting into a tight spot with creditors. Your budget will also show you where you can make savings.
Once you have a basic small business budget, you can start playing with the numbers.
- What if sales go up by 10%?
- What if you lose your biggest client?
- What if you negotiate lower rent?
You can try dozens of different variables here. Many businesses use this type of exercise to find out when they can afford to hire staff. You can too, by adding additional payroll to your costs and seeing how this affects your profit.
You can create several versions of the budget to cover many variables. Experiment as much as you like and see what the outcomes look like.
Painless budgeting for your business
Now that you know how to go about setting a budget, there’s nothing stopping you from getting started – except, perhaps, the effort. Sifting through financial records to pull the data you need can be gruelling. Even so, it’s best to avoid shortcuts such as estimating costs.
If you’re looking for a quicker and less error-prone way to build a small business budget, consider accounting software such as Xero. When set up right, an accounting system will automatically record all your income and expenditure, so you don’t have to manually gather the information.
3. Don’t be afraid to ask for help
Setting a budget isn’t complicated but it can still help to involve an expert. A bookkeeper or accountant can double-check the numbers and help you make realistic predictions about business growth, upcoming expenses, and tax exposure. They can also advise you on what to do if the actual numbers deviate from the predicted ones.
Bookkeepers and accountants charge for their time. But when it comes to business budgeting they will often save you far more than they cost. So, if in doubt, ask one for help.
Budgets put you in control of your business
The real advantage of setting a budget is that it helps you make strategic business decisions. Not sure what’s going to happen over the next six months? Try a variety of different scenarios and see what numbers emerge.
Always remember that a small business budget isn’t set in stone. As your situation changes, you can make changes to your figures and see what it means for your profit.
The Finance Department specialises in helping your business go from start-up to scale-up by being able to provide bookkeeping, accounts and your full finance department throughout your entire business lifecycle.
Take a look at how other businesses have benefitted from outsourcing their bookkeeping and accounting »
Blog adapted from our friends at Xero – Bookkeeper, Emma Northcote-Green.