Take a moment to think with me… what is one of your favourite words? Maybe…
Holidays? Lunchtime? Travel? Christmas? Family? Shopping?
I’m going out on a limb here, but I don’t think ‘budgets’ were in your answer.
But that’s okay, because at Your Accounting Sanctuary, it’s one of ours. And I’m excited to tell you how it can become one of yours too.
Firstly… What is a budget? You might think of your budget allocated to groceries each week. Which makes sense. But in the context of businesses, we like to make it a little more specific.
A business budget gives you direction on spending within your unique parameters whilst anticipating change and making a profit.
So a budget is important for a few reasons. Mainly, because it ensures the business stays on track, and also because it acts as a reference point that figures can be compared against. When things don’t align, budgets can help identify what needs to be changed. Budgets can also help to analyse business performance. Other key reasons include helping with strategic planning, attracting investors, and preparing for tax.
There are many types of budgets. These include static, performance-based, zero-based, and variance analysis budgets. Working closely with an accountant can help select the most appropriate style of budget for you and your business.
Planning budgets carefully, can help significantly improve your accounting situation. Because it allows business owners to focus on cash flow, reducing costs, improving profits and increasing returns on investment.
Here is a simple step-by-step process that will help you to create a small business budget:
- Tally your income sources
You need to know how much money your business is bringing in, and where it is coming from. You should start by looking at your sales figures. This process will help you identify how many types of income you have, and therefore how to nurture each one in a way that ensures success.
- Determine fixed costs
Your fixed costs are costs that stay the same month to month. For example, big payments like rent for your office space and staff wages. As well as smaller things like payment per month to retain your website’s domain name, costs for wifi and data. Once you know these amounts, you are able to determine how much needs to be earned in order to pay for these, and also make profit. Add these costs together to find a total amount of your monthly fixed cost.
- Include variable expenses
These can be a bit trickier to calculate, it’s important to remember that they are more of an estimate than an accurate, exact number. At the end of each month, calculate what your variable expenses were. For example, your electricity bill, purchases for printer ink or paper. Over time, you’ll be able to gain a clear understanding of an approximate variable expense.
- Predict one-time spends
Most costs will be fixed or variable, but every now and again there will be a more significant one-off expense. Such as a new desktop or laptop, moving offices, or an upcoming team building course. Once you know these are approaching, include them in your budget. Simultaneously, you should consider adding a ‘buffer’ budget. If something breaks or needs updating; this will allow for random things to occur, without impacting the business significantly.
- Put it all together!
Now it’s time to put the different sections of your budget together. This will help to visualise the business’s current state and inform future planning. After you’ve ordered your categories, you can use the formula: total income – total expenses = total net income.
Though budgets are important for everyone, they are particularly critical for small business owners. Operating on a limited amount of finances can be tricky. Knowing when to invest in something, when to save, and when to take that leap of faith can be largely determined by the amount of money you have access to.
Clearly, budgets are really important, but sometimes they can be confusing. That’s why so many small business owners will get external help when it comes to anything ‘accounting’.