Everyone Needs a Budget. How to Set One for Your Business
Preparing a budget is critical to the overall success of your business as it can be used as a tool to help you lead, manage and understand the finances of your business. Structured budgeting can make all the difference to the growth of your business as it enables you to concentrate resources on improving profits and reducing costs.
Why Does My Business Need a Budget?
First off, any successful business needs to have a well-constructed budget in place. A properly prepared and updated business budget serves several important purposes:
Plan for start-up costs. When you first start your business, it is important to have a realistic idea of how much money you will need to get the ball rolling. By creating a budget, you will have a clear understanding of all the expenses necessary for starting up.
Get a business loan. If you need to borrow money to get your business started, then any lender will want to have an overview of your cashflow situation. A budget enables potential investors to see how much of an investment you require and provides a forecasted cash flow for the next 3 years.
Plan your spending. A budget can give you information on how much your business can afford to spend each month and how much you can draw as a salary for yourself. When you first start out, you may not be able to pay yourself much, but it enables you to see what the future looks like and plan your living expenses accordingly.
Know your required profit. If you create the budget for your business on a "required profit" basis, you can see how much money you will need to make to meet all your expenses. A required profit budget starts with all the expenses you need to pay each month, leaving the required profit as the income number required to make the budget balance.
The Benefits of Setting a Budget
The key benefit of setting a budget is that it allows you to create a focus for the direction of your business. By budgeting and forecasting for the year ahead, you will have a greater sense of clarity of the overall business and will be able to set and review targets accordingly. Budgeting also gives you the chance to review the performance of your business and make continuous improvements, as well as anticipate any potential problems. By creating a budget, you will have gathered sound financial information on which to base your decisions and therefore, you will have greater confidence in those decisions.
How do I Set a Budget for My Business?
To set a budget, the first thing you need to do is list all sources of monthly income such as projected sales, and then list all fixed costs and overheads such as rent, wages and advertising. One critical step when it comes to these estimates is to be realistic, make your budget as realistic as possible by estimating the income low and the expenses high to give you a “worst-case-scenario” overview. Once you have completed this, if your expenses are too close to your expected income, this highlights a cashflow problem. By creating a budget in advance, it lets you see any potential financial problems before they arise. You can also read our article on managing your business cashflow for some top tips.
How do I Ensure My Budget is Accurate?
In addition to estimating your income on the lower end of the scale, and your expenses on the higher end, there are also a number of other ways you can make your budget as accurate and therefore, as useful as possible. If you invest time in creating a comprehensive and realistic budget, it will not only be easier to manage but it will also be much more effective.
Once your business has been up and running for 1 year, you can use the previous year’s figures as a guide for forecasting the following years budget. It is also a good idea to involve the right people when it comes to drawing up your budget, ask staff with financial responsibilities to provide you with estimates of figures for your budget. If you balance their estimates against your own, you will have a more realistic budget.
Why You Should Review Your Budget Regularly.
To use your budget effectively, you need to review and revise it frequently. This is particularly important if your business is growing and you are planning to expand. Using an up-to-date budget allows you to be flexible and also lets you manage your cashflow effectively, enabling you to identify what needs to be achieved.
When you review your budget, there are 2 main areas to consider, your actual income and your actual expenditure. Each month you should compare your actual income against your budgeted income and analyse the reasons for any shortfall. Evaluating these variations will assist you in setting future budgets more accurately and allow you to take action where needed.
By reviewing your actual expenditure against your budget, you will be able to predict future costs with greater reliability. You should look at how your costs differed from your budget and assess any reason for these changes, i.e. increase in monthly rent.
Getting Help with Creating a Budget for Your Business.
At Devonshire Green, we are happy to help you deal with any challenges you might face with setting a budget for your business. If you are unsure of the accuracy or depth of your business budget, we can help you assess the numbers and set a realistic budget. If you would like assistance with this do not hesitate to contact us for advice.