Whether you manage your business finances yourself or employ an accountant to do them for you, creating and understanding your business budget is key to making your business successful. An accurate budget will give you a clear picture of your business, and enable you to both make strategic business decisions and plan for the future.
If you’re thinking of hiring staff, investing in stock or equipment or getting finance, an accurate budget is critical.
Creating a budget need not be nerve-wracking, and you don’t need to be an accountant to do it. To set up your business budget, follow these five steps:
Step 1 – Gather your figures
Firstly, remember that the budget is a tool to help you make decisions about your business. It’s not something that your business will be judged on, so make it as accurate as possible. Don’t estimate the figures; if you do not have accurate Profit and Loss data it’s worth working with an accountant or using accounting software to get a realistic set of figures before you start.
To prepare your budget you will need a Profit and Loss statement and your Balance sheet.
What should go into a Profit & Loss statement?
A Profit and Loss statement should include your income (ideally month by month, including recurring income and forecast income) and expenses. In your expenses, don’t forget to include:
- Rent and utilities
- Staff payroll
- Sundries (such as entertainment or cleaning supplies)
- Overheads (such as utilities, water, internet or phone)
- Debt repayments
- Depreciation (assets such as tech equipment lose value as they age, so this should be included as a cost. An accountant or bookeeper can help with how to show this on your P&L statement accurately)
Find free P&L templates here.
What goes on a Balance Sheet?
Your balance sheet should be divided into assets and liabilities. Under assets, list the assets your business has which might include land or property, vehicles, equipment, cash in the bank and invoices which are yet to be paid.
Under liabilities, you should include any debt, unpaid tax invoices, and any unpaid bills (for example from suppliers or credit cards).
Your balance sheet shows your assets minus your liabilities. Find free balance sheet templates here.
Step 2 – Involve the right people
To make your budget as accurate as possible, involve staff who manage functions with expenditure, such as manufacturing or HR, to ensure the costs reflected in your P&L are as accurate as possible. When forecasting income for the next 12 months, make sure you’ve got input from anyone managing sales or new business in your company to identify potential peaks and troughs in income.
Step 3 – Analyse opportunities and threats
Put your balance sheet and P&L together to create a budget for the next 12 months minimum. Now you should be able to accurately predict what your outgoings and income will be month by month, and identify whether you have money to re-invest or whether you need to consider getting finance in place to boost your cash flow. Are there points in the year where cash flow is tight? Could you re-negotiate contracts with suppliers to lock in costs for a longer time frame?
Step 4 – Create a contingency plan
What would happen to your balance sheet if you lost a key client, a supplier increased their prices, or you faced a problem such as fire/flooding? Use your budget to model different scenarios to give you confidence that your business is prepared for every eventuality.
Step 5 – Keep your budget updated
Now you have created a budget, keep it updated by adding in actual expenses and income each month. Comparing your forecast expenses and income to your actuals will help you improve your forecasts and targets. Were sales slower than you predicted? Were costs higher? The more accurate you make your budget, the more useful it will be as a tool for managing your business.
You can also add variables to your budget to see what impact adding staff, expanding premises, or adding a new product line may have on your business growth.