Business budgets are an essential tool in your arsenal when it comes to tracking the financial health of your business. An effective budget helps you plan your income and spending, and so ensures that you can properly allocate funds for needed items and activities.
A business budget also helps you to:
- Set business goals
- Decide on the direction of your business, and
- Get financing.
A budget is an especially important tool for every business, so let’s look at the steps you should take in order to create an effective one.
Develop Your Budget
When preparing your initial budget, there are a few factors you should consider. These include:
This is the amount of time the budget is set for. It might be monthly, quarterly, or yearly. Choosing the most effective time frame for your budget will depend on the needs of your business.
Your fixed costs are those expenses that don’t deviate over your budget’s given time frame. This might include rent, salary, insurance, and other known costs.
Tip: When deciding on your salary, strike a balance. Figure out what you would pay someone to manage your business and allocate yourself that amount.
Your variable costs are those that change over the course of your budget’s time frame. This might include utilities, costs of materials, or staff wages. If you’re unsure of a variable cost, always estimate higher. You’re better off overestimating a variable cost than underestimating it.
Tip: If possible, try to turn your variable costs into fixed costs. This way, you’ll know what to expect in the long run.
Your business income is the income you can expect to make over the budget’s time frame. You may need to give your business time to find its feet before you’re able to accurately predict this number using past periods.
Tip: Stay conservative when predicting your business income. You’re better off underestimating your income than overestimating it.
Monitor Your Budget
You should keep an eye on how you’re tracking against your budget throughout the budget period. Pay particular attention to your actuals – that is, the comparison of your actual results to your budgeted amounts.
Tip: A good bookkeeping system like Xero will help you keep track of your finances and aid you in calculating the difference between your actuals and your budgeted numbers.
Analyse Your Budget
Through budget analysis, you’ll be able to determine if you’re spending too much or whether you have surplus cash that could be put to better use.
If you’re overspending, consider ways to reduce your expenses, including cutting back on non-essential items or services.
If you have surplus funds, look at ways to reduce debt, create a financial safety net, or grow your business.
Tip: Effectively analysing your budget will help you determine seasonal patterns. You’ll be able to make more effective business decisions accordingly.
Prepare a Business Budget Today
Preparing a business budget is one of the best ways to keep your company on track and above water. These tips can get you started in developing an effective business budget.
Looking for ways to better streamline your budgeting process? We can help you prepare your budgeted financial statements. Contact Bookkeeper 2 Business today.
The information in this article is general in nature and might not be right for your circumstances. Please arrange a meeting with one of our Accountants or Bookkeepers to discuss your particular needs.