Businesses need budgets. Even really small ones. So how do you go about setting a business budget? What are the main things you need to put in? And what will it tell you? Bookkeeper, Emma Northcote-Green, takes us through budgeting 101.
Your business has a budget, even if you don’t know what it is. There’s a point at which it’s profitable, a point at which it loses money, and a point at which it becomes unsustainable.
If you know where those points are, you’ll have far more control over what happens. You can make informed decisions to eliminate wasteful spending and get to profitability faster. A well-planned small business budget will:
- show you how many sales you need to make in order to cover costs
- figure out how much money you can reinvest in the business
- find out when you can afford to hire help
When setting a business budget, you need good numbers. Don’t guess at what’s coming in and what’s going out. You could be making assumptions that just aren’t true. Take the time to look into your accounts and dig out the real figures. It might sound like hard work but it can be done quite simply.
Small business budgets are easier to make than you think
Budgeting has a lot of baggage. It sounds boring, complicated and even daunting. But there’s no need to put it off. There are just three broad sets of figures to get your head around and they’re really simple.
Setting a budget is part of becoming financially literate, and it’s a vital skill. The better you can ‘read’ the figures relating to your business, the more successful you will be. And you don’t need to become an accountant in order to do it.
The numbers that matter when setting a budget
So, which figures are important for your small business budget? Fortunately, you don’t need to consider everything. There are certain groups of figures that tell the story of your finances clearly and simply.
1. Profit & Loss report
This tells you at a glance whether you’re making money or losing it. To do that, you’ll subtract your expenses from your income.
Income (revenue). How much money are you generating from sales of your products or services? It helps to break these into:
- Recurring income: regular and reliable revenue from client retainers and contract work.
- Expected income: predictions of future income. This is a forecast of what your business is likely to earn.
Expenses (costs). How much money are you spending on business costs such as staff, raw materials and marketing? As with income, it helps to break these into:
- Recurring expenditure: your monthly payments for rent, utilities, payroll and so on.
- Sundry costs: occasional payments for office supplies, client entertainment expenses and other items.
It can be easy to overlook some of the costs of doing business. To help capture them all, consider things like:
- Depreciation: business assets, such as computers and equipment, lose value as they get older. That should be counted as a cost.
- Overheads: make sure you don’t overlook fixed costs such as rent or energy (electricity, gas, transport fuel).
- Payroll: the total cost of employing your staff (including insurance, taxes and benefits).
- Debt repayments: regular outgoings to repay loans or other business investment.
If you have more revenue coming in than costs going out, you’re making a profit. If it’s the other way around, you’re making a loss. A loss is ok in certain situations but they’re not sustainable over the long term.
While you’re aiming for a profit, remember that big profits aren’t necessarily good. You’ll be taxed on that money, so it might be better to reinvest in the business. Setting a budget will help you decide when and how to do that.
2. Balance sheet
This tells you what your business is worth. It’s the difference between what you own and what you owe. On the plus side of the balance sheet you’ll find:
- the value of assets owned by your business, such as work tools or real estate
- cash you have in the bank
- invoices that have been sent to clients but have not yet been received
All of these are business assets. On the other side of the balance sheet are your liabilities, which include:
- expenses that have been incurred but not yet paid, such as bills from suppliers
- taxes that are due to be paid in the near future
- loans or other business debts that you have
The balance sheet shows your assets minus your liabilities.
3. Trial balance
When you combine the Profit and Loss report with your balance sheet, you get a trial balance. It shows all your debts, credits, assets and liabilities. In other words, it represents the entire balance of your business accounts.
With all this information at your fingertips, you’re ready to start setting a budget.
Creating your first small business budget
Now that you have all your current financial information in black and white, you can create a forward-looking budget. It will tell you how much you spend running the business, how much you can afford to invest to improve the business, and how much you can pay yourself (and any shareholders).
You’ll have a much better idea of what your cash flow will look like, and you’ll be able to see where you can make savings. Plus you can run experiments to see how the business will cope with different situations.
Testing different scenarios – what if…?
Once you have a basic small business budget, you can start playing with the numbers.
- What if sales go up by 10%?
- What if you lose your biggest client?
- What if you negotiate lower rent?
These exercises can help you decide when to hire staff. Just add payroll to your costs and see what the numbers look like.
You can create several versions of the budget to cover many sorts of variables. Experiment as much as you like and see what the outcomes look like.
Now that you know how to go about setting a budget, there’s nothing stopping you from getting started. Except, perhaps, the effort. Sifting through financial records to pull the data you need can be gruelling. Even so, you should avoid shortcuts such as estimating numbers.
If you’re looking for a quicker and less error-prone way to build a small business budget, consider accounting software. When set up right, these systems will automatically record all your income and expenditure so you don’t have to manually gather the information.
If you add a dashboard app, the software can visualise your income and expenditure as a series of graphs and charts. That makes it very easy to grab the numbers you need and spot trends in how the business is performing. Plus the dashboard is live all the time, so you can check up on your budget from day to day.
Don’t be afraid to ask for help
Setting a budget isn’t complicated but it can still help to involve an expert. A bookkeeper or accountant can double-check the numbers and help you make realistic predictions about business growth, upcoming expenses, and tax exposure. They can also advise you on what to do if the actual numbers deviate from the predicted ones.
Bookkeepers and accountants charge for their time, of course. But when it comes to business budgeting they will often save you far more than they cost. So if in doubt, ask one for help.
You’ll feel more in-control
The real advantage of setting a budget is that it helps you make strategic business decisions. Not sure what’s going to happen over the next six months? Try a variety of different scenarios and see what numbers emerge.
Having a budget also means you’re able to seek finance. So if you suddenly find you need a loan for something, you have everything you need to go and apply for one right away.
But most of all, a budget gives you more certainty and confidence. You get a clearer picture of the key metrics for your business and you know where you stand. It’s like turning on a light in a dark room. You’ll be able to see the obstacles and find your way around them.
And always remember that a small business budget isn’t set in stone. As your situation changes, you can make changes to your figures and see what it means for your profit.