Budgeting for small businesses: Why and How to do it

There seems to be nothing that strikes fear in to the heart of people more than the mention of a budget, whether for business of personal use. For some it is the thought of the numbers and maths involved that cause them to run away, for others it is the thought of restrictions put in place by a budget, or the time it takes to prepare a detailed budget. Maybe it just seems too boring to get started.

Through helping many businesses with their budgeting process I have learnt a lot about the whys and how of budgeting which will help you move your business forward and overcome the fears of budgeting.

Why: The benefits of a budget

Budgeting is more than about controlling the costs of a business, although this is certainly an important function. A budget will put you in control of your businesses future. The more you can understand your businesses finances the more successful you can be.

It will help you see exactly how much income you need to break even (cover your costs) and show you what money you can expect to see left over at the end of every month.

Budgets can help you make strategic decisions, for instance you can see the impact of hiring more staff by increasing the staff costs, or what if you win the big client you have been speaking to. Testing these scenarios out on paper is much easier and safer than trying them in real life.

If there is something you wish to invest in to help the growth of your business you can factor this in to your budget, enabling you to make sure you have the funds available when the time comes. This can make large one-time costs less of a shock and more like day to day expenditure.

A budget will enable you to look for financing, providing the information that you need to apply for a loan.

Even a basic high level budget will help you focus on what you wish to achieve in the coming year and is a great start to using budgets successfully for your business.

How: Where to start

To put together a good budget you need to know what your income and expenses actually are. The first thing to do is to look at the past to find this information. If you have good accounting records, either through software or on excel sheets you should be able to identify the money you have made and what you have spent fairly easily. The other option is to look through your business bank account and note down all the transactions that happened in each month. Some things you would expect to remain the same every month, like rent or phone bills; however things like sales or stock costs may vary. Do not forget to include expenses such as depreciation on equipment or tax which won’t be so easily identifiable from your bank accounts.

Once you have identified all your existing income and costs you can pull this together in to a starting point for your budget. Generally budgets look at the year ahead on a month by month basis, splitting out the income and costs in to monthly chunks to make it more manageable. If you have a seasonable business (selling Christmas decorations or ice cream for example) ensure that your budget reflects this with more income in the relevant months of the year.

When you know what you are earning and spending now you can add in the things you know about that are coming up in the future. Maybe you have signed a new contract and will have additional revenue coming in now or you have decided to rent an office and have new costs associated with that.

Finally there are the things that are not so certain. Think about your growth strategy, are you aiming for a 10% increase in sales over the year? Are costs going to increase by 3% due to inflation? Make some reasonable predictions and add these in to your budget as well.

If you have more income the costs then you will be making a profit which you can use for reinvesting in the business, giving yourself a pay rise, paying dividends out or paying off debt. There can be tax implications to what you do with profits so it could be worth talking to a tax advisor to discover the most tax efficient strategy for you, 2 Sisters Accounting can help you with this.

While setting a budget is not difficult, getting help from an accountant or bookkeeper who is an expert in budgeting could be a wise investment. While they will cost money they can help ensure your budget is accurate, that everything adds up as it should and help make predictions on business and cost growth. They can also ensure you have all your expenses covered; particularly knowing the tax you will need to pay so you do not get a nasty surprise at the end of the year. Often they will have invaluable advice on areas to save money to improve your profitability. Accountants don’t have a reputation for penny pinching for nothing.

What now: How to use a budget

Creating your budget is not the end; you now need to compare your actual results to your budget on a regular basis to track how you are performing and adjust your behaviour where necessary. With regular reviews you will be able to see where you are spending more money than you thought, or if you have more coming in than planned. Maybe your phone bills have been running wild and you can speak to your provider to see about getting a cheaper plan. Or possibly your sales are doing much better than you anticipated and you need to look at hiring some help, which the additional income will help support.

Budgets for small businesses can and should be updated as you move through time; they are not a static unmoving document. As you find out more information or your situation changes review your budget and make the necessary updates. This will give you more confidence and clarity over where your business is going.

If you produce monthly management accounts this process will be easy as you can use a simple table to show the actual figures vs the budget and the differences between the two. A professional accountant will be able to help you set up this process and highlight the areas you may wish to look at as having the biggest impact on your specific business.

Whether reality is good or bad news compared to the budget a regular review will allow you to adjust your strategy and meet the challenges head on to help your business grow.

If you would like any help with budgeting please get in touch with us at 2 Sisters Accounting and we would be happy to provide advice and guidance.