A budget is a guide to financial performance of the business and a way to quickly identify overspending and potentially loss making situations. Here are answers to the most common questions asked about small business budgeting.
When and why should businesses review their budgets?
Budgets should be reviewed monthly. This can be done by entering a budget into accounting software and printing an Actual versus Budget Profit and Loss Report at the end of each month. This is an effective way of ensuring money does not get lost or wasted.
How can businesses reassess their expenditure in difficult times?
Set aside some time to work through every line of the Profit and Loss Report for the previous year, and ask yourself “Is there a better/more cost effective way of achieving this outcome?”
In good times it’s easy to ignore Profit and Loss because there is plenty of income, but when times get tough it’s important to also look closely at where the money is being spent.
I recently went through this exercise in my own business and came up with approximately $250,000 of savings per year.
Some were tough to make but as a business owner, if you don’t make them, the cost comes out of your own pocket.
What changes can businesses make to their budgets during periods of cash constraints?
Look at the high percentage of spending and identify ways to minimise them.
For example if you operate from rented premises, consider whether the amount of space you occupy is appropriate. Moving a business may seem daunting, but worthwhile if it’s going to make big savings to the bottom line.
Telephone and communications services are another area to scrutinize. I was amazed to discover we were paying eight different providers, some of which were totally unnecessary. We saved approximately $1,000 per month by changing and consolidating our providers.
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How should small business budgeting be approached for any transition in business direction?
The first thing is to actually have a budget. Very few small businesses have one. The excuse we often hear is “I don’t know what my income will be, so how can I do a budget?” My answer to this is that what most businesses should at least know is their expected expenditure.
Here’s a plan for a simple budget
- Start by entering your fixed costs into a spreadsheet with a column for each month of the financial year, plus a total for the whole year. Fixed costs are those that you incur whether you sell anything or not e.g. rent .
- List all fixed cost items by line, and using the previous year and your expectations for the coming year, enter a monthly figure for each expense item.
- Enter a total formula for each month and the full year of expenses. You now know what your break-even point is for each month and the year. Break-even is the amount you need to sell to create neither a profit or loss, but a $0 result.
- Now you can enter an estimate of income for each month.
- If there are variable costs, such as product purchases or labour if yours is a service business, enter them just below the income. Variable costs are those that are incurred only when a sale is made.
- Enter a formula deducting the variable costs from the income to give a gross profit figure.
- Now add a final formula at the bottom deducting the fixed costs from the gross profit to get your expected net profit figure.
The outcome from this is something to aim for and work with. Each month you can replace the budgeted figures with actuals to create a ‘rolling budget’ which will tell you what your yearly results will be if you meet budget in the remaining months of the year. This can be a very enlightening exercise and show where you need to focus attention on both income and expenditure.
Note: this exercise can be the basis of a cashflow forecast by removing any non cash items such as depreciation and entering an opening and closing bank balance for each month. This enables you to see the monthly future bank balance and where any extra funding may be required.
What are the key benefits businesses can gain from a good budget?
A budget helps you to determine a break-even figure, therefore providing a target to aim for each month. A regularly reviewed budget enables you to compare against actual performance and quickly identify losses. Preparing a budget provides an opportunity to think about where you want your money to go.
Ultimately, small business budgeting allows you to plan operations and so gives you a better handle on things.