Of all the demands being placed on small business owners, for many, the preparation of a budget is a long way down the list of priorities. The reason for this is often because the perceived benefit is of limited value, they don’t know where to start, or ‘are you kidding, I don’t have time to write a budget!’
The truth is your budget doesn’t need to be complicated, and it can help control your spending, whilst maximising your available resources.
Four great reasons to have budget
- Manage your cash flow -If you know how much your expenses are going to be for the month, you can plan so you have the necessary cash available. Helping avoid any last minute panics!
- Price setting – It provides you will a revenue goal so you know how much money you need to be making in order to cover your costs and hopefully make some profit. If this price is too high compared to your competitors, it provides a prompt to consider any efficiencies you could make in your cost base
- Applying for finance – whether it’s a loan, a grant or equity. Any business wanting to raise money is now expected to have a good handle on their finances. It is also expected that you’ll be able to demonstrate how additional investment will impact on the performance of your business in the future
- Flexibility – a budget lets you track your performance, allowing you to make necessary changes to rein in costs or increase spending to take advantage of growth opportunities
Where to start?
Many accountants now offer budgeting as a service to their clients (including Chilli). But there are loads of tools out there now if you wanted to have a go at it yourself.
The first and most crucial step is understanding where your business it currently at. As we point out in all our blogs, we recommend Xero for a great piece of accounting software. Xero can help you organise your information on past sales and costs, which is necessary as the starting point for any budget.
From here you need to consider your future plans. Specifically give some thought to:
- Are there any opportunities for costs to be reduced or better managed?
- What strategies have worked well for achieving sales in the past? Is there an opportunity to extend this going forward?
- For any sales strategies or opportunities, is there an associated cost? If so, can the cost be quantified?
- What are your competitors doing? How does their offering compare to yours?
- Are there any possible changes likely to impact your industry? E.g. regulation / new tools / emerging technology
- What are your resources for creating / selling / supplying your service or goods?
Armed with this information, you are then ready to start your budget.
Have a look at your historical sales performance. Are there any seasonal variations that need to be factored in? Then based on the points above that you’ve considered, think about what your sales are likely to be going forward.
Maybe you can see a trend that your sales seem to be improving 5% month on month. Whatever the number is, often with the right software this is just a case of sticking 5% in a box and the rest is calculated for you.
This is often best thought about by splitting into at least two groups. The first group is any direct costs like wages, purchases, or transport which are required in order to make or supply your goods / services. These are often linked directly to your sales, (hence the name direct sales). Therefore, any increase in sales will probably see an increase in these costs too.
The second group is more administrative costs. This might be rent, utilities, cleaning etc. you get the picture. Generally they have no direct relationship to sales, but might be subject to changes in inflation or government policy.
From this, you’ll get a good idea of what your monthly profit or loss is likely to be. As you go forward you’ll then be able to track your performance against the budget.
Again, the right tools will be able to tell you where any variances are coming from. This is crucial in helping you understand your business and manage it effectively.
Need some help?
Maybe you can appreciate the value a budget has to offer but you don’t have time to do it, or you don’t know where to start? No problem! Get in contact with Chilli and we’ll happily give you a hand.
We also offer lots of other great services for business owners who want to look to the future, like business plans, identifying key performance indicators, or cash flow forecasting.
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