Are you a small business trying to create your budget and financial plan?
Creating a budget helps you achieve your business goals. Learn how to set yourself up for success with our comprehensive guide to developing a budget and financial plan tailored to your business needs.
What is a business budget?
A business budget is a financial document that overviews a company’s cash flow and financial health. At its core, a detailed budget outlines plans for income, expenses and capital investments over a specific period and will include the data for the following:
- Sales £/Revenue/Turnover
- Variable costs/Cost of Goods Sold (COGS)/Direct costs
- Gross Profit £
- Overheads/Indirect Costs/Fixed costs
- Net Profit
A Cashflow forecast will include the bank balance at the beginning and end of each period, highlighting the impact of trading on cash reserves.
It’s an essential tool that small business owners should have in place. It helps you make better decisions by providing an overview of how much money your business is making and spending and the estimated future costs. A budget also allows you to compare expected results with real-world results to adjust your financial strategy if needed.
All budgets should provide visibility into cash flow and offer guidance on maximising profitability and return on investments.
Why is a financial plan essential for business success?
Properly managing money is a vital element to the success of any company, and having a realistic budget in place can help make the process easier. It can clarify how to properly allocate resources, establish goals and expectations, track progress against those objectives, and measure performance over time.
A detailed business budget should be tailored to each owner’s needs by accounting for their income sources, expenses, future costs, revenue streams, and risk management strategies.
By creating a detailed roadmap of your finances through forecasting income or cash flow models that project future earnings over multiple years, you can better prepare yourself for potential risks or opportunities that may arise in the future. Additionally, it allows you to identify critical areas where improvements or changes need to be made to stay competitive and profitable in your industry.
Getting Started With a Good Budget
Writing a business budget is one of the first steps every small business owner should take when starting out.
Businesses need to budget at least once a year. The budgeting process enables companies to project their expected expenses and income over the coming year, ensuring they do not run out of money or miss critical investments or opportunities.
Without a budget, businesses may be making the right decisions, or they may not. Creating a budget is crucial to help your business grow the way you want it to. Using vital financial data to help make informed, logical financial decisions and plan accordingly.
Creating a well-structured budget is critical, as it will help you avoid costly mistakes and ensure you’re following a strategic course for your company. It doesn’t have to be complicated or time-consuming.
Start by gathering your business’s financial information, such as income and expenses from the previous year, and then estimate what those figures might look like for the upcoming year.
Once the data has been collected, analyse it to determine where to allocate resources to achieve desired goals.
Also, consider what your aspirations are for the business in terms of revenue and profits. What does the business need to achieve in sales, margins and growth to get there?
This process can help you spot how to improve and what the realistic growth of your business looks like, along with giving you a spending plan to help you foresee potential financial problems or opportunities ahead.
Read the Blog – How do I seek out investment or funding opportunities to support growth and expansion? article here.
How do you create an effective business plan for financial health?
Here are some simple steps to create a business budget covering all aspects of your business.
List all your fixed costs, such as rent, utilities and insurance. And then the frequency of payment – monthly, quarterly, or annually.
Next, include all variable expenses such as materials or productive wages – these are the costs of selling your products or services (COGS Cost of Goods Sold).
Then begin tracking all income sources, including sales and investments.
Estimate any potential changes in income or expenses based on current market trends and adjust accordingly.
Consider seasonal fluctuations when making projections for revenue and spending levels so you can stay ahead of any surprise costs that may arise during peak periods of activity.
Plot out periods of growth and expansion – modelling the increase in costs and revenue.
Once completed, you should have a picture of how your business should perform over the budgeted period. This should then become a working document that is used regularly.
How To Stick To a Small Business Budget
Creating and managing a budget can be one of the most important steps to financial success. Knowing how to review your budget is essential to ensure you stay on track towards achieving your goals.
To accurately measure performance, have financial statements prepared each month that reflect actual results and use this information to review how the business has performed against budget.
Here are some tips for reviewing your budget:
First, evaluate all sources of income. Ensure that each reference is accurate and up-to-date since these numbers will determine how much money you have available for covering costs and making a profit.
Ask questions like: How does it compare to expectations? What areas could be improved with specific actions and focus? Which areas would give the most significant improvement? Where are there quick wins?
Next, review all expenses, including fixed costs and variable costs. Identify any areas where you could cut back, if necessary, to save more money each month.
Were we again ask questions like: What costs can we cut back on? Where can we improve on the value we’re getting from the investment? How can we manage and control costs? What systems are available to improve efficiency?
Ensure this process is regular and diarise the appointment in your diary/calendar – even if you’re a one-person business.
Make collating the data easy and quick to do. The more laborious this task is, the more likely you will put it off. Invest in accountancy systems that automate data entry.
Get someone else to review the accounts with you, empower them to ask questions and challenge the numbers – it’s a safe environment to play with strategies and ideas.
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