Budget effectively is essential for any small business owner. An annual budget provides you with a structured financial plan, making it easier to allocate resources, set realistic goals and protect your firm’s finances.
But what’s the secret to budgeting for small businesses? Keep reading to discover our top tips.
Why are budgets so important for small businesses?
Think of your budget as a roadmap for business success. It helps you chart a clear path towards your financial destination, warning you of potential potholes and detours along the way.
Drawing up a budget typically involves analysing your current finances and looking at market trends to predict your expected future revenue, profits and cashflow over a particular period. This can make it easier to:
- manage your finances and allocate resources effectively
- make well-informed business decisions
- set and meet realistic financial goals
- identify potential risks and opportunities
- secure funding from banks and investors.
Conversely, failing to properly budget could have a negative impact on your small business. Making good business decisions and managing your money can be difficult without a good understanding of your finances and a clear goal to aim towards.
Small business budgeting tips
Know your expenses
Understanding and tracking your spending sits at the heart of good business budgeting. You can split your business expenses into two categories: fixed costs and variable costs.
Your fixed costs are expenses that stay constant. You’ll typically need to cover these costs regardless of how well your business performs. Examples include rent for business premises, employee salaries and insurance.
Variable costs, meanwhile, are expenses that fluctuate depending on your business activity. Examples of variable costs include sales commissions, raw materials and utility bills.
Knowing where your money is going each month can give you a clearer picture of your finances, allowing you to estimate your future expenditure, identify where you can cut costs and allocate funds with confidence.
Estimate your income
You also need to work out your estimated income. Look at your business’s past sales data to determine how much money you’re likely to generate over the next year, and compare that with your expected expenses.
While there’s nothing wrong with being ambitious, we’d recommend being fairly conservative with your predicted sales to avoid potential pitfalls.
When looking at your income statement, you may notice that your sales figures rise and fall at different times of the year. Identifying these trends allows you to budget accordingly so you can curb potential cashflow issues during the quieter months.
Master your bookkeeping skills
Adopting good recordkeeping habits is key if you want to create a reliable budget.
Unfortunately, bookkeeping is often too time-consuming for small business owners, who already manage a hefty administrative burden. If you can’t give these tasks the attention they need, we’d recommend using cloud accounting software, a professional bookkeeper, or, preferably, both!
A tech-savvy bookkeeping expert can keep your records up-to-date throughout the year using systems like QuickBooks and Xero, helping you base your budget on accurate, up-to-date financial information.
Think about your goals
Identify your short and long-term business goals. Are you hoping to expand your operations? Do you need to pay off any debt? What do you want to focus your efforts on this year?
Whatever your hopes for the future, it’s vital to set realistic, achievable and measurable goals. Gaining a good understanding of your business performance and working with a financial adviser can help you create a spending plan that gives you the best chance of success.
Identify risks and opportunities
Examining your historical financial data and current market trends can help you identify challenges and opportunities your business could face in the future.
Instead of simply reacting to events when they happen, you can take a more proactive approach to budgeting, mitigating potential risks and taking advantage of opportunities early on.
Measure your progress
Once your plan is in motion, make sure to measure your business’s actual financial performance against your original budget. Monitoring your progress can highlight potential issues, allowing you to adjust your strategy accordingly.
Review your budget
Budgeting should not be a one-off task. If you want to take control of your firm’s financial future, you’ll need to review your budget on a regular basis.
Helping your small business thrive
At Stapletons, we pride ourselves on supporting small business owners like you.
Whether you run an established family business or you’re a startup entrepreneur, we’re here to help you take control of your financial future.
Get in touch to find out how our budgeting support can move your business forward.