How to create a budget
Budgets are empowering. They give you the knowledge and insight to eliminate wasteful spending and get to profitability faster.
A well-planned budget will:
- show you how many sales you need 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 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’s worth it.
Compiling a budget is 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’ll be. And you don’t need to become an accountant to do it.
The numbers that matter when setting a budget
So, which figures are important for your budget? Fortunately you don’t need to consider everything. These groups of figures clearly tell the story of your finances:
1. Profit & Loss report
This report 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 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, 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 (eg, 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 investments
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 okay in certain situations but losses aren’t sustainable over the long term.
If you make a profit, think carefully about what to do with it. Could you:
- drive bigger profits by reinvesting in the business?
- save money by paying down debts quicker?
- keep cash in reserve to ride out future revenue dips (this is an especially big consideration for seasonal businesses)?