Planning a budget is an essential part of managing a small business. If you create a realistic budget and plan for future growth, your business is more likely to survive and thrive. We’ll walk you through the benefits of having a business budget in place and show you how to get started quickly and easily.
The benefits of planning a small business budget
You may think creating a budget is just about controlling your finances. But while it’s important not to overspend, a business budget has lots of other benefits, too. In particular, it allows you to:
- Provide a financial forecast to banks or investors if you’re looking to raise funds
- Identify potential problems or cash flow issues before they occur
- Limit expenditure on unessential items
- Help you plan for one-off purchases, such as expensive new equipment
- Make sure you have enough money for future projects to grow your business
How to create a small business budget
If you’re setting up a small business, your business budget should be one of the first things you create. If you’re an established business, the best time to start planning your budget is two to three months before the beginning of a new financial year. The second best time is now.
Start by listing out your income and costs under the following headings:
Projected revenue (sales and other income)
Estimate future revenue based on sales from the previous year. If you’re a new business, your market research should help you estimate your expected receivables.
Fixed costs or overheads
These are costs that remain the same, whatever your level of sales. Examples include costs associated with running your business premises, staff costs and insurance.
Variable costs
These costs vary each month, and you may be able to scale them up and down. They’re often directly related to your volume of sales, such as the cost of raw materials or the cost of transporting goods.
One-off costs
Larger, one-time purchases such as replacing your laptop or buying an expensive piece of equipment.
Once you’ve listed your expenses, you can use a simple spreadsheet to plan out your revenue and fixed and variable costs over the year.
The spreadsheet will allow you to calculate how much profit you can expect each month. It’ll also help you identify any months when cash flow may be a problem, months when you’re likely to generate more profit and months when you’re likely to afford a one-off purchase.
How to use and review your budget
You’ll get the most out of your business budget if you revisit and review it regularly. Ideally, try doing this monthly.
Update your budget spreadsheet with your actual income for the month. Consider the reasons for any shortfall or high turnover compared to your projected revenue. And add in your actual expenditure, including both fixed, variable and one-off costs. Look at any differences between your real and projected spending and consider the reasons why this happened.
By reviewing your budget regularly, you’ll be able to identify what you need to achieve in the next budgeting period and the areas where you may need to make changes to reduce costs or increase your income.
