How to budget for a better business
The success of a business is determined by the quality of the decision making. Whether you’re starting a new business, or you’re an experienced business owner, it’s important to make good decisions from the outset.
Good business decisions begin with sound business planning and a key part of successful business planning is getting your budgeting right.
In this guide we look in-depth at what business budgeting is, how to create a small business budget, and why it’s so important for business success.
What are we going to cover in this article?
Getting started with business budgeting.
- What is a small business budget?
- Do small businesses really need a budget?
- How much should a small business budget be?
- Why business budgeting is important?
What should be included in a small business budget?
How to create a small business budget
- Do your research and check industry standards.
- Learn to love spreadsheets.
- Factor in a contingency.
- Control your costs.
- Regularly review the business… are you on track?
Business budgeting during a crisis.
- Take better control of your outgoings.
- Create relationships with multiple suppliers.
- Create relationships with many business partners.
Getting started with business budgeting
What is a small business budget?
A small business budget is a detailed documentation of your financial position and your financial projections, which can be both short-term and long-term. This is typically based on your historical financial data, but as a new start-up you won’t have that data to call upon.
Your small business budget plan will include your projected income and expenses, which in-turn helps you to make decisions about where your money will be best spent for maximum return.
Do small businesses really need a budget?
The ability to estimate and match expenses to revenue (both actual and projected) is vital for business owners, because it helps them to determine whether they have enough money to fund their business operations.
It can be argued that a budget is more important for small business owners due to having less revenue and therefore less margin for errors.
This can include the day-to-day running e.g.: energy and utilities, salaries, expenses, potential expansion plans, sales, and marketing costs., and of course taxes.
Without a budget or a clearly defined plan, a business risks spending more money than it is taking in. On the other hand, it risks not spending enough money to grow the business and remain competitive.
How much should a small business budget be?
Regardless of your business’s size, your budget should not exceed what you expect to in the budget period. As mentioned earlier, business owners can forecast what their income will be from their historic financial data.
However, if you’re a new start-up business you won’t have any historical data to call upon. That’s when your accountant or financial advisor can help. It’s important to take advantage of their financial skills to help you set your pricing and forecast what you can realistically target for income in your first couple of years of trading.
Your budget should consider all of your revenue sources and all your outgoings, plus contingency funds that you may need to call on for emergencies.
Large organisations typically set annual budgets, but as a small business owner you might find it is easier to budget from month-to-month and gives you greater control over your finances. As a business owner, at any given time you’ll need to know your numbers.
Why is business budgeting so important?
There are many advantages to great business budgeting, including:
Decisions - Budgeting enables business owners to make informed decisions.
Opportunities - It can help identify potential growth opportunities for a business.
Resilience - Business budgeting can help a business to survive, and even thrive, during lean times when the economy might be struggling.
Risk - A budget can provide enhanced visibility of a business’s spending, which can help business owners identify potential financial risks to the business.
Performance - A business budget plan can provide a business with a clear benchmark to measure against. From this a business owner can see how their business is performing.
Targets - A budget will give a business owner the concrete numbers on which to base their financial goals.
What should be included in a small business budget?
A small business budget should include all income and expenditure over a given period. The numbers are likely to fluctuate form one month to the next, so it is advisable to work to an average, and you could even overestimate your expenditure and underestimate your income to help you keep a tighter rein on your finances.
Here’s a brief breakdown of what you should include in your business budget:
All your expenditure and income.
A small business financial plan, which will typically include:
a cash flow statement.
an income statement.
a balance sheet.
a break-even analysis.
a personnel plan.
a sales forecast.
Past sales figures.
Sales forecasts for the budgeting period.
Contingency fund plan.
Trend information e.g.: seasonal trends and/or industry trends.
Your growth projections for the budget period.
How to create a small business budget
Do your research and check industry standards
Not all industry sectors are alike, so it’s important to do some research about your industry. Your accountant or financial advisor should be able to help you with this. It’s important to be aware that a small business is more susceptible than larger competitors to an industry downturn or a wider economic downturn.
Learn to love spreadsheets
Create a spreadsheet to determine what percentage of your revenue will need to be allocated to your monthly costs, including: supplier services, raw materials, rent, taxes, business insurance.
You’ll likely need to create a number of different spread sheets for an overall view of, and control of, your financial plan.
Factor in a contingency
It’s important to remember that your business budget is an estimate of what revenue you’ll generate and what you’ll spend. There’ll be months when either could go up or down. Because of potential unforeseen fluctuations, you should make sure you factor in some slack and make sure you have enough money put away to help you through any lean times, and certainly before you look to expand your business or take on more staff.
Control your costs
Keep control of your costs. If you can get the same products and services for less, from different suppliers, then it’s worth exploring that option.
You can also cut costs in other areas of your business including:
Bulk buying to reduce unit costs.
Switch from desktop computers to laptops, they use less energy.
Ditch your own computer servers and switch to cloud storage.
Request an energy audit from your supplier.
Change your lighting to energy-saving bulbs and motion detection lighting.
Go paperless where possible.
Review the business against your budget plan… are you on track?
Don’t take your eyes off your plan. Regularly review where your business is at and update your budget if necessary.
Tip to help your business thrive when times are tough
As we write this piece the UK economy is facing some of the toughest challenges for forty years. The aftermath of the expenditure incurred from the Covid-19 pandemic, combined with the rising costs of goods and fuel that have been influenced by the conflict in Ukraine, are taking their toll across the world.
Here in the UK the inflation rate hit a 41 year high of 11.1% in October 2022, while the cost of energy and utilities keeps rising which is putting pressure on households and businesses.
We look at a few tips you could adopt to help your business thrive when times are tough.
Take better control of your outgoings
The more you must pay out each month, the less money you’ll have to develop your business and for yourself.
Try and clear as much of what you owe as is possible, so you can free-up cash for other more important business expenses. You could even look at refinancing some debts into long-term agreements with smaller monthly payments.
Once you’ve achieved this, you can begin to build up cash reserves that can provide you with a safety net in case an unexpected cost needs paying, or if a business growth opportunity arises that needs funding.
Create relationships with multiple suppliers
Working closer with your existing supplier, whilst also creating new strategic alliances with other suppliers can help you to generate extra revenue and cut costs.
Create relationships with many business partners
Great business is largely based on reciprocity. If you’re a small business and money is tight, you’ll likely look to cut costs in areas such as marketing.
While advertising in publications and online can be fruitful, it can also be expensive, and in some cases the return on your advertising spend (ROAS) can be difficult to track.
John Wannamaker, the successful United States merchant, religious leader, and political figure, considered by some to be a "pioneer in marketing,” famously said “Half the money I spend on advertising is wasted; the trouble is I don't know which half.” Despite today’s technology advancements, it is still difficult to attribute sales to specific marketing activities.
Creating strong relationships with other business partners can bridge the gap and keep new business coming in for years to come… and you can identify exactly where the business came from.
Referral marketing is all about building and developing relationships and trust. It requires commitment from all the parties involved. You might need to be prepared to refer to your new referral partners first before they will refer business to you.
There is still no substitute for face-to-face networking and developing strong business relationships to help you win more new business and developing a referral marketing strategy can help you survive an economic downturn and generate business for many years to come. Referral marketing is based on strong relationships and trust a) with your referral partners, and b) with your customers. If you do a great job for someone who has been referred to you by a referral partner, then that referral partner will likely refer to you again.
Likewise, if you do a good job for a customer, then they will likely refer their contacts to you too. Or you can incentivise your customers to refer you with rewards such as discounts on your goods and services, vouchers, or you could even create your own company reward scheme.
You can find more helpful articles in our cost of living hub
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