7-Step Budgeting for Small Businesses
Disclaimer: These are tips on budgeting for small businesses. Debbie Roberts Consulting does not provide accounting, tax, or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
Budgeting is what makes or breaks a small business. When you’re running a business, every dollar counts. To understand the whole picture of your finances and prevent financial risk, you have to manage your budget.
With a budget strategy in place, you can have control over your expenses. You can plan your business for growth and see which areas of your finances could be improved. You can also forecast where future costs and revenues go to ensure you’re not overspending.
The good thing is, it is easy to create an effective budget plan. If it’s too much for you to get your head around then definitely consult your accountant earlier rather than later.
1. Understand your income and expenses
Budgeting for a small business starts with understanding your income and expenses. It’s easier to make informed business decisions when you know where the money comes from and where it goes. You can do this by keeping track of your financial transactions, reviewing financial statements, and calculating key metrics such as gross profit margin, and return on investment (ROI). Also, look into your income statements and balance sheets. It’s important to know your numbers!
2. Keep track of your fixed costs
Fixed costs are business expenses that do not change as the level of production fluctuates, and includes things such as rent, land rates, insurance premiums or employee salaries which are important to determine your ideal budget. Fixed costs are expenses that are easy to anticipate as they don’t fluctuate. By determining your fixed costs, you can budget more accurately and plan your expenses accordingly.
3. Look into variable costs
Your variable costs can impact your company’s profitability. It’s important to understand them too. Utility expenses, travel costs, delivery fees, materials and training expenses are examples of variable costs. As the amount may fluctuate from time to time, consider keeping a close eye on your variable costs. Depending on several factors, these costs may rise or fall.
By keeping track of these costs, you can identify which areas you may need to adjust in your budget. For example, if your source material has a significant spike, you may be able to find cheaper alternatives.
4. Overestimate expected costs and minimise expenses
Now, to avoid constraints on your budget, you want to have some flexibility.
This can be done by overestimating your cost and reducing expenses. By doing this, you’re building a financial habit that creates breathing room for mistakes. For instance, if you’re hiring someone for a service, allow extra time and funds, and put this in your budget to cover unexpected expenses.
Examine your business operations to identify areas where spending can be minimised. For example, consider whether printing receipts is necessary, or if going paperless could be a cost-saving alternative. Maybe you need to reduce the number of subscriptions and memberships you have. Evaluate your expenses and determine which areas can be substituted with more affordable options or completely removed.
5. Create your profit and loss statement
Your Profit & Loss (P&L) statement provides a clear picture of a business’s financial performance and is essential for assessing the profitability and financial health of the business. This statement will include factors such as your gross profit, net profit, operating expenses, trading income and cost of sales. By looking into these areas in your statement, you’ll get a better understanding of how effective your budgeting is.
6. Review and adjust your budget regularly
When you’ve got your budgeting plans in place, review and adjust regularly to ensure you are financially on track. You can set a schedule to go over the records. This could be done monthly, quarterly or annually.
Analyse your budget performance vs your actual budget to determine if you stayed on budget or went over it. If you find that you’re consistently overspending in certain areas, you may need to adjust your budget or look for ways to reduce your expenses. Monitor, tweak and budget better. Rinse and repeat.
7. Set up Accounting Software
It is hard to manually keep up with the numbers. For more efficient, streamlined accounting and budgeting, it is worth considering automating your finances by using accounting software like Xero, MYOB or QuickBooks to name a few.
By automating your financial transactions and processes, you’re keeping track of everything whilst saving time and reducing the risks of errors. Accounting software helps businesses allocate their budget, track expenses, prepare financial statements and more.
More business advice from Debbie Roberts
Without a doubt, top-notch budgeting can propel your business to success. It is highly recommended that you engage an accountant to assist you with budgeting if needed. While Debbie Roberts does not provide financial advice, she works with businesses to help them plan and develop strategies for better growth and revenue. Are you looking to scale and grow your small business? You can book a consultation with Debbie Roberts at firstname.lastname@example.org or call 0477 999 796.