Creating a business budget
Having a budget for your business means you can track your spending at any given time, whether it’s a month, quarter or year you’re monitoring. It enables you to look at where your money is going day to day against what your business projections are. That way you can identify trends in your spending that are necessary or can be improved and be prepared for any eventuality.
Getting down to business
Creating a budget is not that hard – especially in accounting software, which often generates an initial budget from your accounting history. You only need to include a few entries to start with. The value of this means that you can add entries as your business develops and grows. Here are the items we recommend you start with:
- Your products and services and your expected sales
- The cost of goods and services from suppliers
- If you have employees or contractors, the monthly wages and, if you are growing, how much you need to hire people
- Rent, rates and utilities if you have a bricks and mortar business
- Don’t forget the small things, they add up! Include equipment such as stationery, computers, maintenance, travel expenses and the items you need day to day to run your business.
These five entries will get you started and will enable you to monitor how you spend your money. Over time you will be able to determine how much you need to save to create a contingency fund if, for example, equipment needs replacing.
When to prepare your budget
Most businesses prepare budgets annually, but don’t be one of those business owners who creates it and then doesn’t look at it again for another year! It’s really important to the smooth running of your business to monitor your spending at regular intervals throughout the year.
Once you’ve set up an annual budget, break this down into quarterly forecasts to monitor against throughout the year. That way you can see your results against the original budget as well as updated forecasts. Most accounting software will give you reports to compare budgets against actual spending. Don’t forget to analyse the variance between actual spending and the budgets. It can tell you a lot about how your business is doing.
Combining your budget with other reports (see our blog on Aged Debtors Reporting) means you can review supplier spend and see what kind of buffer you need between you paying your supplier and the money you receive from customers. You might find that there is a considerable amount of time between money going out and money coming in, creating a credit squeeze. So, think about whether you are paying out too early – can you hold off until you are paid, or do you need extra cash in the bank to as a buffer?
Don’t sweat the small stuff, but don’t forget it either!
As item 5 suggests, don’t forget the small things that might get missed when budgeting. Take, for example, subscriptions you have that are renewed automatically every year. Set time aside to consider exactly what you need to spend your money on to keep your finances healthy and your business growing. And before you spend your money, whether for small things or big-ticket items, consider how much income that investment would generate, even if you put off spending for a while for the things you need.
If you’d like to discuss creating your own budget and would like some help to start, contact us today.
