As a business owner, creating a budget is an essential step in managing your finances effectively. A budget is a financial plan that outlines your expected income and expenses for a given period, usually a fiscal year. No matter how big or small your company is, a clear budget helps you make informed financial decisions, manage cash flow and achieve your financial goals.
With the new financial year upon us, now is the time to start creating a budget for your business if you haven’t already done so. In this article, we offer some top tips on how to create a budget that will help your organisation in its quest for success in 2023 and beyond. Here are some steps to follow when creating a business budget:
Determine Your Fixed Expenses
Start by reviewing your business expenses from the previous year. This will help you identify your regular expenses such as rent, utilities and payroll or any other consistent, recurring expenses that help to keep your business running. Make sure you include all necessary expenses to give you an accurate picture of your financial situation.
Knowing your total fixed costs helps you to determine the bare minimum your company spends and the cash flow it needs to survive. You can also use this time to make sure you’re getting the best deal for your business.
Predict Your Variable Expenses
No two businesses will have the same variable costs. They usually depend on what resources you need and when you need them, such as raw materials or labour. You might need to quantify your services to get a better understanding of the kind of costs you can expect. Remember that your top line revenue target is dependent on sales, so you need to factor in the cost needed to achieve that number.
Variable costs are more flexible than fixed costs, so you can try and see where you could potentially save money here. As variable costs can be slightly unpredictable, try to also plan for any large expenses. This includes things like technology and equipment or any major tasks or projects e.g. recruitment drives and expansions. Overestimating expenses is always better than underestimating them.
Estimate Your Income
Next, you need to estimate your income for the upcoming year. Consider your sales forecast, market trends and any other factors that could impact your revenue. It’s important to be realistic with your projections to avoid overspending. You don’t want to end up spending more than you can afford to as this will increase your potential losses.
Track Your Projected Profit & Loss (P&L)
Once you have estimated your income and expenses, you can calculate your projected profit or loss for the year. Your net profit margin will give you an idea of how your business is expected to perform financially. If your projected profit is low, you may need to make adjustments to your budget to avoid running into financial trouble. You may also want to consider projecting revenues, such as using your current sales activities, to help forecast future revenue.
Remember it’s ok to project a loss, especially if your business is a startup as you may choose to invest heavily in your business one year to reap the benefits in years to come. You do however need a plan to make sure your business doesn’t continue to run at a loss.
You can learn more about starting a business in our article Tips For Starting a Business.
Understand Your Risks
You should consider any short-term or long-term risks associated with your business. This includes things like wage increases for your staff that may affect your bottom line. Keep in mind any potential risks associated with the current economic or political climate that could affect your cash flow.
Factor in Seasonal and Industry Trends
Some industries are seasonal, which can impact your budget as your profit and cash flow will not be consistent all year round. If you run a summer clothing store, for example, your revenue will likely be higher during the spring and summer months compared to autumn and winter.
Without factoring in periods of high and low customer demand, your budget will be way off track. A certain level of market research may help you to keep up with industry trends and allow you to predict your revenue. Having an emergency fund may also be beneficial to cover your business expenses during slow periods.
Identify Your Sales Cycles
Using these seasonal and industry trends, you can start to identify your sales cycle, including where your sales dip and spike throughout the year. This helps you manage your cash flow to budget for the funds needed to cover any changes in demand. You could even create seasonal budgets using your sales cycle; for example, allocating more of your budget towards marketing during a drop in sales.
Create an Emergency Fund
It’s essential to have an emergency fund in case of unexpected expenses or a sudden drop in revenue. Set aside a portion of your budget for emergencies to avoid dipping into your cash flow and jeopardising your financial stability. This will help to keep your finances healthy and also prevents you from spending any money you might need in the future.
If you’d like to learn more about improving cash flow in your business please read our article 10 Ways to Improve Cash Flow in Your Business.
Set Spending Goals
Once you have a clear understanding of your expenses and income, you can start setting spending goals. Identify areas where you can reduce expenses and allocate more funds to areas where you need to invest more. This will help you prioritise your spending and ensure you stay within your budget. Spending goals are essential to ensure you keep your business’s finances looking healthy.
Review Your Budget Regularly
Finally, review your budget regularly to ensure you’re staying on track. This will help you identify any areas where you’re overspending and make adjustments as needed. You should also consider setting up regular reviews to ensure you stay on top of your budget. This helps to monitor all of your income, costs and revenue so you can adjust your budget whenever you need to.
Consider Breaking Your Budget Up
If calculating a budget for the entirety of your business seems overwhelming, try breaking your budget up. This can mean concentrating on a monthly budget for example. This can help track your revenue easily and also help you to keep on top of all of your incomes and outgoings.
Creating a budget can seem overwhelming at first, but it’s an important step in ensuring the financial stability of your business. By following these steps and regularly reviewing your budget, you can make informed financial decisions and achieve your business goals.
How Eventura Can Help Your Business Succeed
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As well as being NetSuite Solution Providers, Sage 200 Partners and Microsoft Gold Partners, we also offer a wide range of managed IT services, meaning we can take your business as a whole and help it achieve digital transformation.
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