Small businesses don’t always have a budget but experience tells us that they should. Without a comprehensive financial budget, the best-case scenario is that it’ll take you a little longer to grow. The worst case is that your business could face serious financial problems. In this post, we’ll run through the steps of creating a budget, like organising your expenses and predicting your income, to give you the tools you need to be successful.
Step 1: Commit to Creating a Budget
Just by reading this blog you’re already on your way to completing step one. A business that doesn’t budget is setting itself up for future challenges. By planning ahead you’re less likely to overspend and be left with too little cash for vital payments.
Your business has to deal with utilities, taxes, insurance, payroll, purchasing and more. Without a budget, these may go unpaid and lead to avoidable issues. Once you’re truly ready to create your budget, you’re ready for step two.
Step 2: Consider Your Revenue
The best place to start is by examining all the sources of income. Determine how much money is coming into the business each month. One month may differ from the next, so try to use the data you have to predict around 12 months’ worth of monthly revenue.
You can check where you might need to adjust your budget accordingly, so you have enough cash at times when you need it. For example, the summer months, or the Christmas period, might be quieter, so you aren’t able to spend as much. It’s important to know details like this ahead of time so you can set funds aside.
Step 3: List Your Costs and Expenses
There will be several fixed costs that you’re required to pay each month. It’s important to categorise all of your expenses, so you know exactly where your money is going.
- Non-negotiables - expenses that absolutely have to be paid each month in order for you to keep the business running. These are top priority payments such as contractual agreements like rent costs and utilities.
- Essential and negotiable - these are significant costs but they can be negotiated to have better payment terms. For example, finding a cheaper supplier or better credit terms.
- Non-essential: if necessary, these are costs your business could live without. They would be the first things to go if you needed to trim the budget.
Step 4: Create a Profit and Loss Statement
The profit and loss statement subtracts your costs from your revenue. It takes all of the funds generated and removes the expenses already spent such as wages, raw materials, office space and utilities.
The more thorough you are when doing this step, the better. The budget won’t be accurate if you forget to include specific bills, taxes or payments.
Step 5: Create a Balance Sheet
After you’ve finished putting the profit and loss statement together, the next thing to do is to create a balance sheet. This will tell you what your business is worth, taking into account all of the money you owe.
On one side of the sheet are the value of your assets, cash you have in the bank and existing invoices that haven’t been paid by clients yet. On the other are any taxes that are due, business debts or loans you have and expenses that you haven’t paid yet.
Step 6: Include Extra Funds
Before finalising your budget, make sure to include some contingency money. You never know when cash is suddenly needed, so it’s always useful to have a little pot set aside for a rainy day. This fund can make sure you’re protected when you most need it.
The amount of extra money you decide to keep aside is up to you. A good rule is to save around three to six months worth of monthly outgoings to make sure you protect your business during any problems.
It’s also worth looking into the possibility of opening a line of credit. The interest rate is generally lower than credit cards and it can help to provide the funds you need during tough times. It’s only a short-term solution.
Step 7: Finish the Budget
By now you’ll have a great idea of how much your business has to spend each month, once all of your bills and payments are sorted.
The next step is to make sure you stick to your budget. Before making any business decisions or purchase, refer to your budget and see how much money you have available to spend. It’ll stop you from overspending and missing payments.
A proper budget will also help you improve in other areas too. It’ll help you know when to prioritise chasing existing payments over pursuing new work. when the time’s right to spend on a new vehicle, as opposed to patching the old one up and making do.
A good budget is just one of the elements you need to have to make sure you’re as financially healthy and stable as possible. Bookkeeping doesn’t have to be a headache, especially if you have the right tools to use.
Download our Bookkeeping Templates for Small Businesses
We’ve created free templates to make bookkeeping problems a thing of the past. The templates will help you to create a profit and loss statement, a cash flow forecast and customer invoices. Download the templates now using the link below and enjoy the feeling of being in complete control of your finances.