How to Budget as a Small Business

How to Budget as a Small Business

As a small business owner there are a host of different challenges you will have to face. Whether it’s finding new clients, marketing or building a website, you’re sure to have your hands full.

But the an important element of running any business is establishing a budget and sticking to it. Having an accurate and detailed budget can be a key to building a sustainable and thriving business.

A budget gives you an overview of your finances so that you know how much is coming into and going out of your business. It provides an up-to-date statement of your current finances and helps you to plan for your long-term goals.

Analyzed correctly, you can work out where you need to cut spending as well as opportunities for revenue growth. A budget may help you decide if you need a small business loan or funding for your business.

It’s also vital to keep your business and personal finances separate. This will make it easier too when it comes to filing your tax return and if you are applying for a business loan.

Here are five simple steps to developing a budget for your business:

1 Calculate your income

The best starting point is to work out how much money you are bringing in and where it’s coming from. By using an Excel spreadsheet, an online tool such as QuickBooks or Xero, or an accountant, you can quickly and easily see your sales figures for each month.

Then you can monitor how much income you are making, and adjust or set new targets for the month or year. There may be some periods, particularly if you are a seasonal business, when your takings are higher or lower, and you might spot opportunities to make more money during those quiet or busy times.

As well as sales and earnings, income can include loans, savings and investments.

2 Determine your fixed costs

In the same way as you calculate your income, you need to keep on top of your expenditure. The first component of that is your fixed costs: these are expenses that remain the same every month, for example, rent, internet and phone plans, website hosting, business rates, insurance, legal and accounting services, and payroll.

If you are starting a business and don’t have any financial data, you need to try and figure out projected costs when drawing up your business plan. You should also consider which fixed costs are absolutely essential and see if there is any room for negotiation on discounts for long-term expenses such as rent, etc.

3 Work out your variable expenses

As the title suggests, variable expenses change on a monthly basis, often dependent on your performance and activity as a business. These include the likes of energy and water bills, shipping costs, sales commissions, contractor wages, printing and advertising costs, transportation and travel expenses.

Again, look at what expenses you can reduce or eliminate. But also look for an opportunity to increase them where necessary, such as capitalising on higher revenue by reinvesting that money back into the business or buying more raw materials to scale your operation.

Over time, you will get a sense for how these expenses fluctuate from month to month, or over a year, enabling you to make more accurate financial projections and budget accordingly.

4 Predict one-off spending

Most of your spending will be on regular expenses that you pay each month. But occasionally you will need to make a large outlay for a particular project, for example, external staff training, new office equipment or building renovation.

Factoring these into your budget will help you to cover such additional costs and protect the business from sudden or large financial burden. You should also set aside funds to cover any unplanned expenses such as replacing a broken computer or hiring a consultant to deal with an IT glitch.

5 Put all the components together

Once you have calculated all your income and expense streams, you need to put them together in a spreadsheet to review the current state of your finances every month. Tally up your income in one column and then your expenses in another to determine your net income or loss.

Then you are in a position to make more informed financial decisions about your business and help it prosper moving forward. With this information, you are also able to more accurately forecast future sales and major expenditures.

For more information about budgeting as a small business or other advice visit the government website.

 

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