How to Create a Budget For Your Small Business
Budgeting is something of an art form, and it’s absolutely non-negotiable—especially for small businesses.
A business that budgets inadequately sets itself up for a plethora of problems down the line. An accurate budget is crucial to your company’s success and prosperity, no matter your size.
Read on for more information on the importance of budgeting as a small business and tips for creating a budget.
What is a business budget?
It is the foundational framework of a business’s finances. It summaries critical information and data that enable the company to operate within their means, manage challenges and obstacles—and hopefully turn a profit.
A good budget is based on a clear and up-to-date record not only of fixed expenses such as wages, rent and loan payments, but also of variable costs such as supplies and utilities and adhoc costs, whether that is a client lunch, one off marketing cost or new piece of equipment.
A budget identifies capital and anticipates revenues, forecasting the fiscal year with a view to assets and expenses. A business owner can leverage their budget to measure performance against expectations and create a roadmap of short and long-term objectives, especially those pertaining to expansion opportunities and financial milestones.
A business that does not have a clear understanding of where its money is coming from or going will never be in a position to expand, commit to clients and suppliers in the long term and take advantage of investment opportunities. Poor budgeting may also lead to rejection for operating loans and equipment purchases, and even negate your capacity to bid on contracts.
So what does good budgeting look like—and how may it be achieved?
How to create a budget for your small business
Creating a budget enables you to set priorities and spending caps, as well as detail where funding originates and how new financial strategies may serve to bring in revenue. Creating—and maintaining—your budget is a multifaceted process, but you’ll soon find it becomes straightforward.
First, you need to really know your numbers. Effective budgeting means breaking down revenue and anticipated expenses by month or quarter. Depending on the size and structure of your business, it may entail further division by department. Departmental budgets should also be broken down by time period, which when summed together will total your master budget.
The items in your budget that will require the most precise bookkeeping and demand more time are those that need the most funding and generate the greatest proportion of revenue. These high-priority items may additionally act as accurate performance indicators for your overall strategy.
It's important to recognise what numbers in your budget you should know exactly and what you are estimating. Getting the certainties 100% right will help you to understand how sensitive your budget is to things you may not be able to control.
For example; have far short of your revenue target can you be before you no longer make a profit. Also try to understand what parts of your budget are linked together and build that in. For example, if you are growing how many staff do you need to service your revenue target.
Budget planning should also account for your long-term needs. If, for example, you rely on seasonal revenue and 80% of your business’s funds come from the three summer months, you will want to account for this in your budget. Strategising for the distribution of your revenue across a fiscal year will help you maximise turnover.
Furthermore, if you anticipate a single massive expenditure a few years down the line, such as for equipment maintenance or upgrades, you’d be strongly advised to begin budgeting for this major financial event in advance.
Budgeting can be daunting for even the most seasoned bookkeepers, but don’t be afraid to ask for outside help. You might even consider hiring an accountant. Alternatively, there are numerous accounting software products available that can take you through your bookkeeping step by step.
The benefits of good budgeting
Effective budgeting will streamline your operations and your entire strategy. The impact of your business’s capacity for good budgeting will seep into every facet of your business plan, and investing a little time in learning how to do it properly will serve you dividends many times over in the long run.
Accuracy and evaluation
Budgeting enables you to see where you're going, as well as where it could be going. Small business finance is all about understanding differences between expected and actual figures when ironing out the kinks in your business strategy and capitalising on your strengths.
Make sure you’re realistic when drawing up your budget. Setting unfeasible goals won’t only be disappointing but may also discourage you from aiming for other goals in the future, even if those new objectives are actually far more achievable.
Optimising cash flow
Tracking your figures will help you establish where you can afford lenient spending and where the purse strings need to be tightened. Regular budgeting enables you to learn—and accept—your business’s financial limits and boundaries. Furthermore, savvy tracking of your business’s finances may enable you to invest in new product lines, as well as prepare more thoroughly for tax.
Read our tips for creating a cash flow forecast for more information.
With a clear budget, you can plan ahead, prioritise financially and implement changes that will improve the health of your outgoings and increase profit.
Forward planning enables you to identify cost-saving techniques, although be sure to keep in mind the potential need to factor in such extraneous factors as market evolution, new competitors and fluctuations in demand. Where you invest your cash may also change over time as you uncover additional marketing needs or unforeseen obstacles.
A solid history of reliable and detailed budgets can demonstrate to lenders and potential investors that your business has the capacity to not only develop a plan but also to see it through to fruition. These parties will want to dig into your financial record, and clear evidence of strong budgeting practices will vastly increase the likelihood of them working with you.
If you are a new business and have little or no financial history, you can compensate at least somewhat by documenting existing industry support for your forecast budget requirements. You may achieve this by researching your marketplace and demonstrating how past trends within your sector or industry support the figures you have come up with. Attention to financial minutiae is a surefire way to impress lenders and investors.
Good budgeting can transform your business
Budgets sometimes have to be tight, and small business finance is particularly challenging when you’re just starting out. Even a slight miscalculation of earnings or cost projections can have a devastating impact on a modest operation.
If you aren’t confident in budgeting yourself, it may be worthwhile hiring an accountant, or at least a business manager with experience in finance. Not only will this individual be able to help you track expenditures and set up accounting systems, but they will also be able to create reports that inform you and your business and assist you in making informed decisions about operations.
For more business articles visit our business hub.
Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more