A budget is the most important tool a business can have, helping it to meet its goals, become more profitable, and assist it through tough financial times. Here’s how to create one.
A budget is a financial plan that helps carry out an organisation’s objectives and strategies. Creating a budget for your business will also provide a guideline for expected income and expenses and enable you to compare your anticipated financial goals with the actual numbers.
A budget can be created in a way that is comfortable for you and your business. While each person tends to create their budget slightly differently, there are a few core components of a budget.
Here are some tips that will help you plan for your small-business budget:
Time frame: Decide if you will be budgeting on a monthly, quarterly or even yearly budget. The time frame of your budget will depend on the industry you work in.
Spreadsheet: Construct a spreadsheet with a column for Income/Expenses, Budget and Actual.
Fixed costs: Start by entering in the business’s fixed costs in the ‘budget’ column. Fixed costs are those that are not dependent on the level of goods or services produced by the business. Expenses such as rent and prepayments fall under this category.
Variable costs: Next, enter the business’s variable costs in the ‘budget’ column. Variable costs are those that change in proportion to the activity of the business. Expenses such as electricity and wages fall under this category. Determine the budgeted expenses by averaging past expenses in each category. If you have just set up your business and don’t have previous figures to work with, research the costs associated with your line of business and create averages based on your findings.
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Income: After entering all your budgeted expenses for the period, insert your forecasted income any other revenue expected into the ‘income’ column. At the end of the period, insert your actual income and expenses for each category.
Actual: The last step is to calculate the difference between the actual numbers and the budgeted figures. Do this by creating two ‘difference’ columns – one as a figure and one as a percentage.
Analysis: Now it’s time to analyse the data. Was your small business budget in line with your actual numbers? If not, it is important to identify why the actual numbers varied from the budgeted figures. By determining the reasons for differences, you are able to identify a problem or capitalise on an opportunity. By monitoring progress you will ensure money is not being wasted on unessential items and that the company is not overpaying for economic resources.
Remember that the goal of a budget is to make sure that enough money is available to keep the business up and running, and to ensure there is a solid emergency fund.
Don’t forget to adjust your small business budget accordingly. If cash flow is tight, your business expenses need to be reduced so use your budget to determine the nonessential expenses to your business and cut those items. If you are having trouble making the budget for your business, it may be worth consulting a professional who will be able to get you started on a budgeting system that works best for you and your business.
What are your tips for preparing a small-business budget?