Creating a Budget for Your Business

1
Creating a Budget for Your Business
2

• As a small business owner, you have to figure out
  a lot of things youve never done before. One of
  them is how to create a business budgetand that
  can be intimidating, especially when youre just
  starting out. How, exactly, do you know where to
  find the right financial informationlet alone
  learn the business finance terminologyand put
  all that data together in the right order?
• Small business budgets are empowering. They give
  you the knowledge and insight to eliminate
  wasteful spending and get to profitability
  faster. A well-planned small business budget will

3

• Show you how many sales you need to cover costs
  (Break Even)
• Figure out how much money you can reinvest in the
  business
• Find out when you can afford to hire help
• When setting a business budget, you need good
  numbers. Dont guess at whats coming in and
  whats going out. You could be making assumptions
  that just arent true. Take the time to look into
  your accounts and dig out the real figures. It
  might sound like hard work but its worth it.

4

• Small business budgets are easier to make than
  you think
• Budgeting has a lot of baggage. It sounds boring,
  complicated and even daunting. But theres no
  need to put it off. There are just three broad
  sets of figures to get your head around and
  theyre really simple.
• Setting a budget is part of becoming financially
  literate, and its a vital skill. The better you
  can read the figures relating to your business,
  the more successful youll be. And you dont need
  to become an accountant to do it.

5

• The numbers that matter when setting a budget
• So, which figures are important for your small
  business budget? Fortunately you dont need to
  consider everything. These groups of figures
  clearly tell the story of your finances

6

• 1. Profit Loss report
• This report tells you at a glance whether youre
  making money or losing it. To do that, youll
  subtract your expenses from your income.
• Income (revenue) How much money are you
  generating from sales of your products or
  services? It helps to break these into
• Recurring income regular and reliable revenue
  from client retainers and contract work
• Expected income predictions of future income.
  This is a forecast of what your business is
  likely to earn.

7

• Expenses (costs) How much money are you spending
  on business costs such as staff, raw materials
  and marketing? As with income, it helps to break
  these into
• Recurring expenditure your monthly payments for
  rent, utilities, payroll and so on
• Sundry costs occasional payments for office
  supplies, client entertainment expenses and other
  items
• It can be easy to overlook some of the costs of
  doing business. To help capture them all,
  consider thing like

8

• Depreciation business assets, such as computers
  and equipment, lose value as they get older. That
  should be counted as a cost.
• Overheads make sure you dont overlook fixed
  costs such as rent or energy (eg, electricity,
  gas, transport fuel)
• Payroll the total cost of employing your staff
  including insurance, taxes and benefits.
• Debt repayments regular outgoings to repay loans
  or other business investments
• If you have more revenue coming in than costs
  going out, youre making a profit. If its the
  other way around, youre making a loss. A loss is
  okay in certain situations but losses arent
  sustainable over the long term.

9

• If you make a profit, think carefully about what
  to do with it. Could you
• Drive bigger profits by reinvesting in the
  business?
• Save money by paying down debts quicker?
• Keep cash in reserve to ride out future revenue
  dips (this is an especially big consideration for
  seasonal businesses)?
• There are many ways to treat a profit and setting
  a business budget will help you decide on the
  right strategy.
• Having a budget is like turning on a light in a
  dark room. Youll be able to see the obstacles to
  your business and find your way around them.

10

• 2. Balance Sheet
• This tells you what your business is worth. Its
  the difference between what you own and what you
  owe. On the good side of the balance sheet youll
  find
• the value of the assets owned by your business,
  such as work tools or real estate
• cash you have in the bank
• invoices that have been sent to clients but have
  not yet been paid
• All of these are business assets. On the other
  side of the balance sheet are your liabilities,
  which include

11

• expenses that have been incurred but not yet
  paid, such as bills from suppliers
• taxes that are due to be paid in the near future
• loans or other business debts that you have
• The balance sheet shows your assets minus your
  liabilities.

12

• 3. Trial balance
• A trial balance is another very useful accounting
  concept. It shows all your debits, credits,
  assets and liabilities on a single document. In
  other words, it represents the entire balance of
  your business accounts.
• With all this information at your fingertips,
  youre ready to start setting a budget.
• Creating your first small business budget
• Now that you have all your current financial
  information in black and white, you can create a
  forward-looking budget. It will tell you how much
  you

13

• spend running the business
• can invest to improve the business
• can pay yourself (and any shareholders)
• A budget will also give you a much better idea of
  what your cash flow will look like. This will
  help you avoid running out of money and getting
  into a tight spot with creditors. Your budget
  will also show you where you can make savings.
• Testing different scenarios what if?
• Once you have a basic small business budget, you
  can start playing with the numbers.

14

• What if sales go up by 10 percent?
• What if you lose your biggest client?
• What if you negotiate lower rent?
• You can try dozens of different variables here.
  Many businesses use this type of exercise to find
  out when they can afford to hire staff. You can
  too, by adding payroll to your costs and seeing
  how that affects your profit.
• You can create several versions of the budget to
  cover many variables. Experiment as much as you
  like and see what the outcomes look like.

15

• An option for painless budgeting
• Now that you know how to go about setting a
  budget, theres nothing stopping you from getting
  started except, perhaps, the effort. Sifting
  through financial records to pull the data you
  need can be gruelling. Even so, its best to
  avoid shortcuts such as estimating costs.
• If youre looking for a quicker and less
  error-prone way to build a small business budget,
  consider accounting software. When set up right,
  an accounting system will automatically record
  all your income and expenditure so you dont have
  to manually gather the information.

16

• Smart software can also show your income and
  expenditure in graphs and charts. That makes it
  much easier to spot trends and see how your
  business is performing.
• Dont be afraid to ask for help
• Setting a budget isnt complicated but it can
  still help to involve an expert. A bookkeeper or
  accountant can double-check the numbers and help
  you make realistic predictions about business
  growth, upcoming expenses, and tax exposure. They
  can also advise you on what to do if the actual
  numbers deviate from the predicted ones.

17

• Budgets put you in control
• The real advantage of setting a budget is that it
  helps you make strategic business decisions. Not
  sure whats going to happen over the next six
  months? Try a variety of different scenarios and
  see what numbers emerge.
• Having a budget also means youre able to seek
  finance. So if you find you need a loan for
  something, you have everything you need to go and
  apply for one right away.

18

• But most of all, a budget gives you more
  certainty and confidence. You get a clearer
  picture of the state of your business and you
  know where you stand. Its like turning on a
  light in a dark room. Youll be able to see the
  obstacles and find your way around them.
• And always remember that a small business budget
  isnt set in stone. As your situation changes,
  you can make changes to your figures and see what
  it means for your profit.
• If you are considering assistance with your
  business bookkeeping, speak with one of our team
  members today.