Key takeaways
- A UK small business budget covers 12 months of expected revenue, cost of sales, overheads, and cashflow, usually split into monthly targets.
- Budgets are typically built from the previous year's actuals adjusted for expected growth, new cost commitments, and planned investment.
- Zero-based budgeting starts from scratch each year and justifies every line from zero, while incremental budgeting uses last year plus a percentage adjustment.
- Reviewing budget vs actuals each month, ideally in a management accounts pack, catches variances early and lets directors redirect spend or defer costs.
- A solid budget should include set-asides for corporation tax, VAT, and PAYE to avoid cashflow shocks at HMRC deadlines.
Introduction
<p>Running a business involves catering for many aspects of the business that can bog you down. </p><p>You can even forget crucial roles, such as monitoring your <a href="https://goforma.com/small-business-accounting" target="_blank">small business finances</a>. Although budgeting may not be the best and most exciting part of running an enterprise, it is fundamental for success.</p><p>When starting a new business, a budget is a vital part of your business plan. Once the business is open and operational, then budgeting becomes an essential exercise that takes place annually or quarterly. </p><p>A budget comprises of fixed and variable costs accompanied by the allocation of monies to reflect business objectives.</p>
The Importance of a Business Budget
Many small businesses fail within the first year due to numerous reasons.
The most common ones are lousy marketing, a poorly designed strategy, bad pricing, and financial issues. Lack of or poor budgeting can also result in failure.
A budget keeps business finances under control and helps to evade debt—which can be hard to get out of.
Here are more reasons your business should have a budget.
- Offers a clear and accurate picture of an enterprise's expenditures and revenues; outlines how money will be spent and how the spending will be financed.
- Drives important business decisions, including marketing, hiring, and purchasing equipment. Also, the business budget determines whether a business should improve marketing efforts, increase efficiency, or reduce expenses.
- It helps to identify financial problems before they arise, such as cash flow difficulties.
- It is a requirement when seeking business loans from financial institutions or equity funding from investors.
- Provides a tool for performance evaluation. You can know how the business is performing based on the revenue you get and the expenditure you spend. Also, budgets provide invaluable insights into the performance of employees and can be used to reward good results.
- With a budget, you can manage money You can allocate finances where they are needed. A budget also assists with cash allocation to determine the funds that go to working capital, fixed capital, and other expenses.
- Sheds light on pricing. A budget helps you determine your expenses so that you know the true cost of making your products and services, and therefore set a reasonable and competitive price for them.
- Increases your flexibility to changing market conditions. You can make the necessary changes to take advantage of growth opportunities or cut costs during slow business periods.
- Useful in bottleneck analysis; can be used to identify what you can do to expand the bottleneck's capacity or shift work around it.
Helpful Tips for Writing a Budget
Although a budget has many benefits for businesses, many businesses struggle writing one. They spend loads of time and effort drafting a budget that meets their business needs, all in vain.
Here are several tips to help you write a best-in-class budget for your enterprise.
1. Be flexible
Writing a budget for your startup may seem daunting and strenuous. That's because you are new in the field, and are unsure of what to include or omit. It is okay to feel overwhelmed at first, but you have better days ahead.
The first year may be full of amendments, but the second year will surely be better. For example, when your expenses exceed your revenue, just make some changes in expenses.
2. Make conservative estimates
During your first budgeting year, it is best practice to make conservative estimates.
Notably, you should underestimate your revenue while overestimating your expenses. Ensure you account for both fixed and variable costs. For a new business, do not forget to include startup costs.
Concerning revenue, make sure you forecast how much you will generate monthly, quarterly, and annually. Many businesses make the mistake of overestimating revenues; do not make it. It would be unreasonable, for example, to project that you will generate revenue of £90,000 in the first year when you do not have an established customer base.
If you have been in business for some time, you can use the last year's figures as a guide in budgeting. You can also use historical information on sales and costs. For instance, if you had revenue of £20,000 the previous year, you can estimate £30,000 if you expect growth to occur.
Do not rely entirely on historical data; also use your sales plan. Importantly, be realistic when drafting your budget.
3. Decide how to spend
Your spending habits determine whether you will adhere to your budget.
If you spend money frivolously on things that do not grow your business, you are wasting money that could be spent in more productive ways. For instance, spending thousands of dollars on office furniture and decor that does not bring revenue is a waste of money.
However, when you increase your spending on marketing because it is generating quality leads, you make a great investment. You can minimise your spend by, for example, deciding whether to buy or lease equipment and office buildings, or buy on finance or outright.
4. Put aside an emergency fund
You should try to spare some portion of your revenue every month and have some saving account. Your budget may be too tight to accommodate some savings, but you should try as much as possible to do it.
These savings will be beneficial in the event of an emergency or sudden expense.
For example, if a big bill suddenly emerges, what would you do if you don't have an emergency fund or savings? You must have a plan that will guarantee your business continues to operate during rainy days.
5. Adjust for seasonality
If your business has peak seasons and off-peak seasons, your budget needs to reflect these cycles. You cannot risk spending all the money you generate during the peak season. You must devise strategies that help you retain money to cover the off-peak season.
For example, you can keep some savings during peak seasons to cater for expenses during quiet months. The bottom line is to make as much money as possible during the busy months to sustain operations during off-peak.
6. Involve the right people
Do not be afraid to ask for help when writing a budget. You can ask your accountant for estimates of figures for your budget, such as production costs and sales targets. Use your accountant's estimates and yours to craft a realistic budget.
According to Forbes, you should think outside the box and involve people in your business, such as employees who can bring fresh perspectives to the budgeting table.
For example, if you operate a business with delivery services, you can involve the drivers because they are well positioned to determine when the vehicles will require repairs or new purchases.
7. Use the right tools
If Excel is not working well for you, it is time to explore other tools.
Most accounting software have in-built budgeting tools that can help you draft a budget. Software increases your efficiency because you can link your budget with previous years' budgets.
8. Plan for budget reviews
Do not be the kind of business that drafts its budget and puts it away until it encounters some financial difficulty.
Review your budget as often as possible to monitor your progress and make adjustments where necessary.
9. Show restraint, not rigidity
What happens when something comes up, maybe a lucrative business opportunity—that was not included in your budget? Do you ignore it because it is not in your budget?
No, your budget is meant to restrain you from unnecessary spending, not limit you from exploring opportunities. Don't be afraid to "bust" your budget to leverage valuable business opportunities.
What Should You Include in Your Budget?
The basic components in a budget include:
Costs
Your budget should include three kinds of costs:
- Fixed costs: these costs are constant and include items like rent, utilities, salaries, legal fees, website hosting fees, accounting services, and insurance.
- Variable costs: they include the costs that correlate with the sales volume such as raw materials costs, labour costs/commissions, advertising, transportation, inventory, printing services, contractor wages, and freight.
- One-off capital costs: these are one-off costs like the purchase of computers, business premises, furniture, software, and gifts.
Revenue
Your budget should include your projected revenue based on your sales history and forecasted sales.
These figures should be accurate because they are the cornerstone of your budget. You can use your last years' sales to predict your projected sales. If you are a startup, some research will help you determine your revenue.
Profits
You attain this figure by subtracting your operating costs from your revenue.
Once you have the profit estimates, you can plan for adding employees, moving to a bigger premise, and buying new equipment. If your profits are negligible, you must troubleshoot your projected costs to identify areas you can reduce.
Startup costs
New businesses should include startup fees in their budgets.
A budget is the oldest management tool in the world and is still viable today. Many business owners and managers write budgets monthly, quarterly, or annually but unfortunately stick them in the bottom drawer and forget about them.
This article is a wake-up call on the importance of budgets for startups and small businesses. It goes a step further to offer tips for writing an incredible budget and what to include in the budget.
