5 Steps To Creating a Financial Budget For Small Businesses
10th January 2018
Your budget isn’t the most glamorous part of running a business, but it is the most vital.
Even the most successful small business will tank if it can’t budget effectively. Simply put, you won’t get anywhere if you’re bleeding cash. The only way to know if you are is by budgeting.
Not sure where to start with your financial budget? Read on and we’ll cover the 5 steps you need to take.
Decide Your Timescale
A yearly financial budget may be the default, but it’s not always the best for small businesses.
Consider whether your business will operate on a yearly, quarterly, or even monthly budget. Things can change quickly for a small business in the course of a year. Using a smaller timescale could help you adapt to changing circumstances.
Don’t lose sight of the bigger picture if you’re using a smaller timescale. A quarterly budget gives your business flexibility. But it also leaves you vulnerable to seasonal surprises if you don’t plan accordingly.
Your business will be subject to the tax year, so bear that in mind when creating your budget. Not all businesses align with the tax year, but many find it easier to do so.
Even if you run a yearly financial budget, you should still break it down into smaller chunks. Monthly is ideal. This allows you to pick up early on discrepancies. In larger budgets, these can disappear among the higher figures involved.
Determine Your Income Sources
This is the nice part. Now’s the time to figure out the money you’ll have coming in, and from where.
The most obvious income will be from your core business. Sales are one of the most common examples. Your income will also include interest and the returns from any investments.
Of course, you won’t often know your income in advance. Use data from previous periods to determine your likely income. Be sure to account for fluctuations you’re likely to see in demand, especially if your business is seasonal.
In theory, this should be the easiest part of your financial budget. If you’re running a stable business, your income should be semi-predictable. And any other income sources, such as loans, should have fixed dates and values attached.
Tally Fixed and Variable Expenses
And then the sad part: where that money goes.
Tracking your expenses will give you a strong idea of your profits. You can use that to allocate resources as appropriate.
First, determine your fixed expenses. These are the expenses you’ll need to pay month-to-month which aren’t linked to the fortunes of your business. These should be easy to calculate. Fixed costs include things like fixed-contract staff wages and your building lease.
Utilities are a special case. If utilities are connected directly to your core business, then they’re variable costs. Otherwise, they’re fixed.
For instance, if your textile business is experiencing a boom, your water rates will likely surge due to production demand. But if you run an office keeping office hours, your electricity bill will present a fixed cost no matter how busy you are.
Variable expenses are those which can fluctuate depending on your profits. They’re reactive and predictive.
Materials and postage costs are two good examples. If your profits increase, they’ll demand more of these expenses.
Also, consider your staffing. You may offer flexible contracts or overtime packages. These will leave you with a variable rather than a fixed cost for your staff wages.
Market research will tell you the likely cost of your stock over the coming year.
Account for Projects
Leave yourself scope in your budget to undertake large projects.
If you use an annual financial budget cycle, you might not know what these projects will entail. But they could be anything from an intensive marketing campaign to an overhaul of IT equipment.
These are technically variable expenses. But they occupy a large portion of your budget, so it’s ideal to track them individually. This can go a long way to stopping your projects from ballooning beyond their original spec.
Try to identify which projects you’re likely to run early. You’ll have a chance to run a cost-benefit analysis to get a clearer picture of your likely spending.
If you’re predicting a surplus income, think about how you’ll invest it. Businesses are more likely to spend on a mailing campaign or other promotional investments when profits are high.
Smart project planning is one of the keys to growing your business. This is what will elevate your budget from a simple operational document to a cornerstone of your business strategy.
Businesses should use the end of a financial period to review their spend and income.
Your budget should be a reactive document. Don’t apply the same financial budget year after year. Use what you’ve learned to adapt it.
This could be a case of cutting costs. Look at your variable expenses to see what you can reign in. Check your fixed expenses to see where you can renegotiate contracts to make savings.
Once you’ve run a budget for a year or two, you’ll start to see patterns emerge. Perhaps you need to tighten your budget during quiet seasons. Or perhaps ramp up your marketing spend for the holidays.
Reviewing your budget will help you form a strategy for your small business moving forward. Seeing your profit shortfall or high turnover will give you realistic expectations for the future of your business.
A Financial Budget is your Foundation
Your financial budget is the foundation of your business. It determines how and when you can spend the profits you’ve earned without collapsing your business. That makes understanding your budget key to running an effective business. Stick to these steps, and you should be prepared to create a functioning budget.
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Filed under Project management