Budgeting is so important for making sure you keep track of your spending and meet your business goals. A simple yet thorough budget can be completed in an evening and can save your business time and money in the long term.
Whether you’re a new or established business, understanding the basics of budgeting is an invaluable skill.
What is budgeting?
A budget is often drawn up for a financial year and contains information about anticipated sales and associated business costs within that period. It allows you to see if you’ll be able to continue operating at your expected level with these projections.
Why do I need a budget?
With a budget, you’ll be able to see how well you’re expecting to perform within a period, and you can monitor actual performance against your original projections.
Budgeting allows you to focus on the true cost of running your business. You’ll be able to spot opportunities to improve the day-to-day running of your business, be prepared for any potential problems and see where you can save money.
What should I include in my budget?
A budget will show estimated income and expenditure for future periods. As a small business, you’re likely to have one overall operating budget which sets out how much money is needed to run the business over the coming period.
When planning out your budget, remember to think about:
- What products or services will you sell, how much will you charge and will you offer any discounts?
- What are your expected sales, and how much production capacity do you have? (Remember to be realistic!)
- How much will you need to pay suppliers?
- Will you need a helping hand? Look into how much employment costs would be if you needed to hire staff to meet demand.
- Where you require equipment such as a new van, or a computer, do your research and shop around.
Is your cost fixed or variable?
Costs like rent, business rates, utilities or the price of materials often remain fixed, regardless of how your business performs.
Variable costs change with your production and sales, such as hiring extra staff or buying more stock to meet demand.
Don’t get caught out
Give yourself a buffer and plan for a contingency fund in your budget. This will cover any additional costs that you didn’t initially plan for. A good aim is between 5% and 10% of your predicted sales volume.
Just getting started?
It’s always important to remember that when you’re starting out, you don’t have to do everything at once. Keep in control of your costs and don’t try and grow your business too quickly. Focus on the quality of your products and your relationships with your customers.
How often should I prepare a budget?
Many businesses prepare budgets annually, but as a smaller business you may benefit from more frequent budgets. Stick to it once you have made it and review regularly. You’ll want to update it to reflect any changes to your business, such as:
- New prices
- New products
- New suppliers
Longer term budgets can become less accurate over time, as more factors influence the budget, so it’s important to review and update on a regular basis.
Using a budgeting template
A simple spreadsheet is an accessible and affordable way of managing your budgeting. You can enter, change and present information easily and clearly. See your sales and spending levels at a glance, and keep track of your projected profits for that period. Invest some time into creating a budgeting template that works for you and update it regularly.
You can download a free template from AAT to get you started.
Become a budgeting expert
This is a reworked version of an original article on budgeting from Informi (AAT's small business website).
AAT is a market leading provider of practical finance and accounting training - and provide online courses to help you or your staff get up to date with best practice when managing budgets.