A budget is a guide to the financial performance of your business and a way to quickly identify where assets and cash flow ought to be allocated. Here are some tip on budgeting in your business.
Put one in place
The first thing is to actually have a budget. Very few small businesses look at financial indicators, let alone have a budget. Many business owners form the view that they do not know what their income will be so do not set budgets or goals however, they should at least know what their expected expenditure is.
A financial planner can help you develop a customised budget and keep you accountable, helping you make informed decisions enabling your business to prosper in any economic climate.
A budget helps you to determine a break-even figure, providing a target to aim for each month or week. A regularly reviewed budget enables you to compare your actual performance to that which you expected and allows quick identification of issues. Preparing a budget also provides an opportunity to think about where you want your money to go and why.
What to include
Your budget does not need to be complicated. A simple spreadsheet can help in identifying your fixed costs and variable costs.
- Identify your fixed costs on a month to month basis – those that you incur whether you sell anything or not, such as wages, rent, utilities, marketing.
- List your fixed cost items by line and using the previous year and your expectations for the coming year, enter a monthly figure for each expense item.
- Calculate the total for each month and then the full year.
- You now know what your “break-even point” is in each month and during the year.
- Now enter an estimate of income for each month.
- Identify any variable costs – those that are incurred only when a sale is made, for example, the supply of relevant materials or the use of labour/contractors – then enter them just below the income.
- Deduct the variable costs from the income to give your gross profit.
- Deduct the fixed costs from the gross profit to get expected net profit.
Each month you can replace the budgeted figures with actuals to create a “rolling budget” which will indicate what the yearly result will be if the budget is met in the remaining months of the year. This can show where you need to focus your attention in relation to both income and expenditure. This can be particularly useful for businesses that have cyclical trade.
A cash flow forecast can also be created by entering an opening and closing bank balance for each month and considering the expected income and expenses. This enables you to see the monthly future bank balance and where any extra funding may be required such as over slow periods, like Christmas.
When and why should businesses review their budgets?
Budgets should be reviewed on a regular basis, ideally monthly. It is an effective way of making sure that you stay on track with your financial goals and objectives and quickly assists in identifying where money is being wasted. It can also help to have someone else review this with you to give you direction and make you accountable.
What to do during periods of cash constraints
Business can be unpredictable at times, so in the more challenging times, look at areas of spending and identify ways to minimise these costs.
Identify areas of spending that are essential and non-essential and look to reduce the non-essential expenditure. Fully utilise any supplier trading terms, paying at the end of the terms so you do not pay interest to your bank on those amounts, seek to extend those terms if possible.
In relation to essential expenditure, look at ways to reduce these costs such as by re-negotiating your bank account interest rates, look to sub-lease part of your premises if surplus to your needs, negotiate better terms with your suppliers, put in place contra arrangements or even changing suppliers (such as internet or telephone service providers) and consider where your money is best spent in relation to advertising, stopping the less efficient advertising.
On the income side, it may assist your cashflow to reward customers for paying promptly or for referring other businesses to your business.
Having a business budget in place enables you to plan ahead, determine areas of expenditure and whether your financial predictions are being met.
WANT MORE INFORMATION?
For more information on how a financial planner can benefit you and your business, please contact Fionne McKillop at McKillop Financial Planning on (02) 9542 2904 or email Fionne@mckillopfp.com.au
Fionne McKillop is principal financial planner at McKillop Financial Planning and owns her own law firm McKillop Legal, which is expert in estate planning, business succession and commercial law.
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