Budgeting for your business is similar to budgeting for your personal life. It helps to keep track of your expenses and make sure that you have enough money coming in to cover all the payments you need to make. Most budgets are for a one-year period and will really help you to manage your finances effectively.
The budgeting process will let you understand the amounts you will need to run your business and any surplus funds which can be set aside for new projects such as developing new products, running a marketing campaign or investing in new equipment or machinery.
To prepare a budget start by thinking about the amount of sales you expect to make in the coming year. Many businesses have some level of seasonal sales – for example you may sell more in the run up to Christmas, during the Summer months or at the time of an industry event. You do need to be realistic about your anticipated sales, especially if you are starting up – it can take quite a while to build relationships or spread awareness about your product or service. Once you have completed your first year in business, you will be able to use your first-year sales information to help predict your next year’s sales. However right at the start it is better to be fairly cautious and ensure that the money you make from your sales will cover your costs.
A budget includes two different types of costs – fixed costs and variable costs. Fixed costs are the costs you have to pay regardless of how many sales you make. For example, the cost of renting premises; heating and lighting; telephone and internet; business insurance and equipment costs. Variable costs are costs that vary with the level of your sales. For example, the costs of materials; assembling your product; packaging and dispatch. By deducting your total costs from your total sales income, you will be able to work out how much money you will make in the year.
At this stage, you should also know roughly what tax you need to pay on your business profit – make sure you set aside money regularly to pay your tax bill on time.
Once completed, your budget will help you to see if there are any points in the year when money may be a bit tight. If your budget does show times when your costs will be higher than your income, then forewarned is forearmed. You may need to review your costs to reduce them, or ensure that any surplus money from earlier periods is set aside to cover these future costs.
Creating a budget helps to identify any potential problem areas and gives you time to address these issues. A budget also provides a benchmark to measure how well your business is doing (often called your ‘business performance’). You can measure your performance year on year to understand how your business is progressing.
A budget is also useful in helping you to benchmark your performance against other businesses in the same industry sector. For example, if you operate in food and drink and the sector has grown by 6% in the past year, you can review your business sales growth and make a comparison. If you have grown by 8% you have done well!