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If your business is like most other businesses, your finance department spends the last few weeks of the year preparing the budgets for the following year. They forecast for the year ahead by using historical data to calculate projected income and costs. Every year, trading conditions and tax law evolve, meaning that this process looks slightly different each time. It's important to keep a close eye on these changes and on your budget to make sure you stay competitive and compliant.
A business budget is essentially a financial plan. It identifies current available capital and is used to estimate all sources of anticipated income and expenses for a business in an upcoming time period. The budget can be for a month, quarter, or year.
The budget should be flexible so it can be adjusted as the business and market environments change. It should also be monitored regularly to assess the actual financial situation with the forecasted figures and adjustments made as required.
A budget provides the business owner the financial information to run the business within its means and plan for the future. Planning ahead is particularly important for businesses that rely heavily on seasonal sales revenue when the bulk of the income may fall within only a few months of the year.
Most companies have several items that are paid regularly, such as:
There are also other peripheral expenses not directly related to the day-to-day running of the business that may be overlooked in financial planning, such as:
Finally, for bonus points, you can also list out any longer-term needs, such as:
The key to success is to include estimates of all income and expenses. Make it as detailed as you can.
This step is key. Without a plan, you could easily go out of business. How else can you be sure that you can maintain cash flow and profit so that you can cover all your expenses? Only a planned budget can give you a basis for control. Make sure your numbers are realistic, cover all the details and try to avoid mistakes.
Having said that, when mistakes inevitably are made, learn from those mistakes. Factor in all the key elements that should be there for your particular business. Don't make it too general, but don’t get stuck on requiring accurate figures. Refer to your budget often, noting differences in your income and expenses as the days go on.
Your business budget is your business plan for the coming year, so make sure your management is involved. After all, they are the experts in your business. Make sure everything is time-bound. Are you experiencing negative, flat, slow growth? Is the market shrinking, expanding, or seasonal? What do you plan to achieve this year, and what has to be supported in order to achieve it? What’s the competition like? How are the key players and new entrants expected to affect your bottom line? Are there dynamic changes or new operational processes that redefine the business? Will you launch new initiatives?
Once business analysis is complete, top management must decide on financial goals, which is what management will base their budgets on. Then, the real numbers-crunching begins in earnest. The budget process needs a timetable. Deadlines must be set to get the ball rolling. Often, managers create a traditional detailed plan based on previous years’ performance and a project that into the coming year. They then intuit an aspirational budget that factors in the assumption of achieving their business goals. These two budgets should also include metrics and ratios that drive business growth, for example, revenue per sales employee and profit per business unit.
Another way budgets can be prepared would be to project profit and loss following the format of financial statements. Businesses that operate on a credit or extend credit should additionally prepare a cash-flow budget. It is critical to how much you'll need – and when – to give management room to manoeuvre in finding new sources for capital.
The annual budget process is a key part of running a business successfully and achieving your strategy. You should view your company’s budget for the year ahead as a living document. Make sure to continuously review it in light of the current business environment and your company’s actual performance throughout the year.
Regular monthly or quarterly reviews provide the discipline for management to thoroughly examine accomplishments and realign tactics to achieve your objectives. It also allows executives to commit to supporting the budget and investment plans, to grow the business organically or source outside funds for the coming fiscal year.
Business Queensland has a guide to work out a cash flow budget. If your business is medium to large, you may require a separate budget for different departments. Whatever size your business is, your accountant can be of great assistance with budgeting as they know your business intimately.
If you would like some support with creating or maintaining a business budget, our experienced and certified bookkeepers can help. Give us a call at 1300 728 875 or fill out a contact form to get started.
Having a detailed budget gives you the means to:
Taking the time to work on a detailed budget and revising it and adapting it as necessary can go a long way to helping your business thrive. Some of the main benefits are:
A budget ensures you have enough cash available to fund current commitments. These include paying suppliers, staff, bills, insurance, loans, etc. Also, because a budget estimates revenue and expenditure, it helps you to stay focused by allowing you to restrict your spending on anything which is not part of the plan, thus improving cash flow.
A budget also makes it easier to make decisions about increasing payments in various facets of your business. For example, calculating if you can afford to increase salaries, pay bonuses, buy new equipment, hire more staff, etc. You can work out the added costs involved and reconcile them with estimated income, both short-term and long-term. You will have a clearer picture of whether these extra costs will be financially beneficial or detrimental to your business and you can make or alter plans accordingly.
No matter how well you plan, the unexpected can always happen. By taking the time to work out a detailed budget, you not only know which short- and long-term expenses are coming up, but you can also plan for any contingencies. Money can be set aside for any unexpected expenses or emergencies that may arise so cash flow in other areas of the business is not compromised.
You could, for example, set aside a percentage of profits in a separate account and allow the funds to build. If you end up with more than you think you’ll need, some of it can be used to pay loans or other expenses. A win-win situation!
The budget can include how much income you are expecting from sales in a certain time frame. This helps you to set sales goals. If those targets are not being met, you can make adjustments in your sales strategies, marketing, or in your estimates of expected income.
Without a budget, your business is, effectively, flying blind. It is impossible to know the financial health of your company and you will have no idea if you have met or exceeded your goals. Without a budget, it may be the end of the financial year before you realise your company has not made a profit.
No matter how small, businesses need to use budgeting and have a working business budget for good financial management. Entrepreneurs are usually so focused on business that managing finances become their Waterloo. You have to have a game plan for the business.
A working financial budget is necessary from the time an entrepreneur conceives an idea until that idea is put into operation. An entrepreneur can't know if an idea is even realistic for a business without a working budget. For small business owner, the working budget helps them assess the financial health of the company. The business owner can't know where they are going or what potential opportunities or pitfalls lie ahead unless they have a budget.
Ready to take your small business bookkeeping to the next level? Darcy Bookkeeping & Business Services is here to help. Take a deep dive into some of the most common bookkeeping issues and pitfalls.
