Every year, it’s important to sit down and make a budget for your business, whether you’re just starting out or have been in business for a while. It’s important for business owners to make a budget so they can understand their financial health and keep track of their cash flow. By making a budget every year, you can keep track of your income, fixed and variable costs, and make sure you have enough money for unexpected costs. In this blog, we’ll talk about How to make a budget, the reasons why you should make a budget, what you should put in it, and how that will help your business succeed.
What is a Business Budget?
A detailed budget plan will include information about the amount of money you anticipate spending over the course of a year, as well as a plan for how and where you might spend that money. It will also enable you to track your progress in relation to your budget. If you’re not sure how to make a budget, there are many resources available online that can guide you through the process. Budgets are not required to be fixed; rather, they are figures that are projected, and if circumstances in your company or throughout the year change, you have the ability to modify your budget plan to reflect these shifts in circumstances.
What are the benefits of creating a realistic budget?
Here is a list of some benefits of creating a realistic budget:
It will help you control your finances
Creating a budget will help you run your business more efficiently and keep track of its finances and cash flow. It will also help you figure out which situations will lead to long-term profits.
For companies that are growing and need to hire more people, it can help you and your team:
- Improve communication by giving correct information.
- Reward good work and change bad habits and behaviour.
- Learn how to judge someone’s work.
- Figure out what your business will need in the future.
2. Set better and clear financial goals
As the owner of a business, making a budget can be an important way to set business and financial goals. The financial goals of a business are very important to its long-term growth. The data will help you keep an eye on how well the business is doing. But financial health and financial goals shouldn’t be the only things you think about when planning. You need to set goals for your business that go beyond just money.
3. Create a flexible framework
Creating a good budget for your business can help you make it more flexible. Small business owners are more likely to be successful if they learn how to budget, review, and make changes based on what they thought would happen and what did happen. Having a budget and keeping track of how much you spent vs. what you planned will help you make better, more accurate decisions. It will also make it easier for you to decide quickly.
With the help of a budget, you can see what is happening and how it will happen. You can also quickly see if your business is getting off track and take steps to fix any problems. By making a budget, you can think about different things that could happen to your business. Using a flexible budget will help you figure out what to do and how to act in business.
How to Make a Budget – Key Elements of a Budget
Are you struggling with how to make a budget for your business? Don’t worry, incorporating these key elements into your budget plan will help you create a solid financial roadmap that keeps your business on track.
1- Projected revenue
It can be hard to guess how many sales you might make and how much money will come into a business. If you are starting a new small business, it can be even harder to guess how much money you will make because you don’t have any past data to use as a guide. Once you’ve had your business for a while, you should be able to more easily predict how much money you’ll make in the next week, month, or year based on how much money you made in the weeks, months, and years before.
Many business owners are wrong because they tend to overestimate their income and have to borrow money or add to their cash flow to make up the difference. You need to be realistic about how much money you expect to make. By making a budget for future income, you will be able to compare actual income to what you thought you would make. The easier it is to keep a healthy cash flow, the better you are at budgeting, and the more you can match up what you thought you would sell with what you actually sold.
2- Fixed costs
Estimating fixed costs can be easy because they are constant, recurring costs that your business needs to run. Fixed costs have to be paid no matter how much money you make.
Fixed costs examples include:
- Premises costs – monthly rent, rates, mortgage costs, utilities bills etc.
- Equipment costs: If you’re running a service-based business, you may need to buy IT gear. For a manufacturer, you may need to buy or rent machinery, catering equipment, furniture, or fixtures and fittings.
- Staff costs: include the cost of hiring people, paying them, etc.
- Insurance: Depending on the type of business you run, you may need insurance like professional indemnity insurance, employers’ liability insurance, public liability insurance, and building or contents insurance.
- Professional fees: Professional fees, like what lawyers charge to make contracts, help with employment contracts, and give advice on rental contracts, are an example of this. Accounting fees for things like using online accounting software, keeping books, filing tax returns, etc.
- Sales & Marketing: Sales and marketing costs, such as advertising, website, email marketing software, and so on.
- Finance costs: Often, you’ll need business loans or financing to pay for your start-up costs, so you should include the cost of paying these back in your monthly fixed cost amount.
Your fixed costs will be very different depending on the type of business you run. For instance, a consultant who works from home will have much lower fixed costs than a manufacturer who needs a building and tools to make their products. Estimating your fixed costs shows you how much money your business needs each month or year to stay in business.
3- Not Fixed costs
Costs that change all the time are called variable costs. These costs depend on how many goods or services you need, make or sell. Costs that change over time can include:
Production costs: One of the biggest costs for many businesses, like manufacturers, is the cost of production. But the more you buy, the more likely it is that the price per item will go down, so you should take that into account.
Staff wages: Staff wages are a fixed cost if you hire full-time employees. If you hire contractors or short-term workers and only pay them for the hours they work, these can be considered variable costs.
Delivery costs: Delivery costs, such as the cost of postage, packaging, and shipping. Again, depending on how much you buy, you may be able to get better prices if you buy more.
Other costs: Other costs, like office supplies, gas, postage, printing, etc., are also considered variable expenses.
In a business, it can be hard to tell the difference between fixed and variable costs because variable costs are more flexible. But if you need to think about cutting costs and making more money, you should start with your variable costs.
4- One-time expenses
When you are starting a new business, you are more likely to have one-time costs. For example, costs like buying the first equipment, furniture, moving costs, software, marketing costs for the first few months, like making a website, etc.
5- Count your profits and losses
Then you look at your profit and loss, you’ll be able to tell how well your business is doing. After you take out your operating costs, interest, and taxes, what’s left is your net profit margin.
A profit and loss statement (P&L) for your business will help you figure out how much money you make minus all of your expenses and business costs. It will also give you a good idea of how well your business is doing financially.
6- Watch the cash flow
Cash flow is the most important thing for any business. Cash flow problems are the main reason why so many businesses fail. You should make a cash flow plan and regularly check your cash flow (depending on your business type, look at it daily or weekly). Checking cash flow will help you stay on top of unpaid invoices, track income, and chase down payments so that your business has enough cash coming in at the right time to cover its costs.
7- Make Adjustments
Businesses never stay the same, so you may need to go back to your budget and make changes to keep up with changes in the business and in the outside world.
8- Cash for Emergencies
You should always have an emergency fund in your business to cover costs that come up out of the blue and to cover customers who don’t pay on time. Many business owners make sure they have enough money in an emergency fund to pay for business costs for three to six months.
Quick Wrap Up
It will require time, insight, and effort on your part to create a budget for your company, but the time spent will be well worth it if you want to ensure that your company continues to expand and that you are not derailed by unanticipated costs or cash flow problems. If you are unsure where to start, you can learn how to make a budget by researching online or seeking advice from a financial professional. You will also be able to better understand the amount of emergency finances you may require, as well as account for seasonal trends, make allowances for unexpected events, and make better business decisions with the use of a budget
Note: Please note that the information provided on this blog is for general informational purposes only and is not intended to be comprehensive or to constitute professional advice. For accurate and up-to-date information, please visit the official website of HMRC.
