Budgeting is a key skill that can daunt any business owner. If your background is not in finance, budgeting can seem an overwhelming chore. However, the benefits of budgeting are aplenty; it enables you to plan your year ahead, to stay on top of costs and to figure out whether you can afford to invest in growth. Budgets will also allow you to relax a little with the knowledge that your money is accounted for.
For this reason, we’ve put together a handy guide for how best to compile the most accurate budget for your business.
1. First of all, you’ll need to identify how much money you have on the table.
This will rely on creating a financial forecast. For an in-depth how-to guide click here. Budgets are usually planned annually, but due to the volatile nature of entrepreneurial companies you may want to plan month by month instead, checking in every week that you are still on track.
2. The next step is to calculate your outgoings.
These can be divided into fixed and variable expenses. Fixed costs are outgoings that will not change, no matter how well or badly your business is performing. These include rent, salaries and depreciation. While these costs can be subject to minor adjustments, they will generally stay the same. This makes them easy to predict. Simply gather your old bank statements and collate all fixed costs to find your figure.
Variable costs are those expenses that will change depending on how your business is trading. The more sales you make, the higher your variable costs become. Some examples are the cost of materials, shipping and bonus payment. Others include charitable donations and paid advertising. In addition to this, during key trading periods you will be likely to increase your budget for paid ads and bidding on key search terms, hence the increase in cost. The benefit of variable costs is that they can be adjusted in response to sales so if you perform better than expected, you can spend more on your variables.
It is also important to consider one-off purchases that you may need to make. There are some costs you cannot predict (broken equipment, supplier delays) but if you know you are going to hire a new employee you’ll need to factor in the cost of a new computer (if provided) or if you’ve planned a business trip you’ll need to factor in flights etc. You can use your business strategy to help you define your one-off costs. It is important you also include a buffer, to protect you from those unexpected costs.
3. Input all of this information into an excel spreadsheet.
There are countless templates online that you can use, but as your budget is such a vital element of your business, don’t hesitate to get in touch with an accountant if you are unsure of where to start. Add Then Multiply can help you with this, as can the Institute of Chartered Accountants.
4. Figure out what profit margin you will be aiming for.
Profit margin = income – expenses. Do some research to find out what the industry standard is, and plan your margins accordingly. If for example you have £200,000 in sales and £180,000 in expenses, your profit margin will be 10%. (200,000-180,000=20,000 which is 10% of 200,000).
This will allow you to analyse both your expenses and income and figure out whether your current plan will allow you to achieve your profit margin. If not, you will need to make cut backs. Go back to the drawing board and see what you can change. Can you plan variable expenses down? Could you contact a cheaper supplier, to reduce the cost of materials? Perhaps you can’t afford to hire that third employee.
“A budget is telling your money where to go instead of wondering where it went.”
– Dave Ramsey
The beauty of a budget is that it allows you to understand exactly where your money is going, rather than wondering where it went, as the quote from Dave Ramsey explains. This will give you some form of control which, for small businesses, is something to treasure.
So there you have it! Not quite so terrifying after all. Once you have set your budget, the main task is maintaining it. This can also seem like a lot of work, but luckily we’ve put together a helpful guide for you to refer to, which we’ll be sharing next week.
Want more info? Here’s a list of useful articles which we have referenced in the post above.
- Create a Business Budget
- Create a Small Business Budget
- Small Business Budget
- Budgets and Cash buffer