If you're going to run a small business, and be successful, you need to be able to manage the budgets. Small business budgets eliminate waste, lets you know how much sales you need to make to cover costs and predicts what investment you need in the business, and when it needs to be made.
In this article, we show you how to create a small business budget to effectively manage your business finances.
What is a small business budget?
A small business budget is a financial plan that outlines the expected income and expenses of a small business over a specific period, typically a month, quarter, or year. It serves as a crucial tool for managing the financial aspects of a small business and helps business owners make informed decisions about spending, investing, and saving.
A small business budget helps business owners plan for the future, allocate resources effectively, secure financing if needed, and monitor the financial health of their company. It's an essential tool for achieving financial stability and growth in a small business.
Why do I need a small business budget?
Your small business budget will show you how to control and streamline your spending. Have you ever heard a customer or contact say “Sorry, we can’t buy this, there’s no budget for it”? This isn’t because they don’t have the money, it’s because they have a budget for this particular area of expenditure and are disciplined about sticking to it.
If your business is required to make £XX in profit each month, and if you are able to control, by budgetary discipline, the expenses of the business, then you are able to accurately predict what revenue you need to make this profit.
How to create a small business budget in 5 easy steps
1. Predict your expenses
The first step when creating a budget is to gather in all of your predicted expenses. You should be able to get most of these from your recent financial statements but remember you’ll also need to make some assumptions about increases and unexpected costs.
You can be as detailed (granular) or broad as you like and the kind of business you operate will inform what your budgetary cycle will be. Some businesses in retail and hospitality for example, will budget weekly, or even daily. For most small businesses though, monthly or even quarterly budgets will be more than adequate.
When budgeting, whether for the upcoming year or for a specific quarter, you will need to calculate:
Fixed costs: monthly outgoings, such as rent payments, certain bills, staff wages, and loan repayments
Variable costs: bills for supplies and utilities, such as water and electricity which can go up or down each month. You’ll need to know what causes the variations too. Are the changes anchored to sales activity? Are they seasonal? etc.
One-off expenses: for example, replacing broken-down machinery or upgrading to new equipment.
2. Estimate your income and “gross margin”
Once you know the costs and outlays of the business on a weekly, monthly, or quarterly basis, you can now feed in what the business needs to take in revenue to cover those costs and outlays.
You will need to be quite detailed when it comes to estimating your revenue. Depending on the type of business you operate, you might want to consider the number of customers you'll get, what they’ll each spend, how often they’ll visit your business, what your capacity is, etc. If you know this, then you can begin to make a stab at revenue.
For example, if you operate a hospitality business and you think that you will have an average of 100 customers per day, each spending £14.50, then you’ll know that your average daily income will be £1,450.
If you have done your pricing correctly, you’ll also know what your gross margin is. Continuing the hospitality business example above, if the gross margin is 70%, then the gross profit would be £1,015 (£1,450 X 70%). You would then be able to extrapolate this to a weekly figure, a monthly figure, a quarterly figure or even an annual figure. It would then be a simple exercise to compare the gross profit to the costs you already calculated in section one. And then you can track your profit.
3. Track your projected profit
When you know what your outlays are, you know what your margins are, and you know what your sales are, you will be able to tell what your predicted profit or loss is. If the projected profit isn’t what you need or want, then you have the opportunity to make the changes necessary to influence the outcome. Remember, there are only really four ways to generate more profit in your business: increase prices; increase customer numbers; increase buying frequency; reduce variable costs. An accurate and robust small business budget will allow you to take the decisions necessary to influence the profitability of your small business.
4. Review and revise
Your budget isn’t set in stone. You should review regularly and if necessary revise. You should always be comparing actual results with your budgets. If they’re completely different, then the budgets may need to be adjusted.
For example, if your budget is suggesting the business should make a profit of £5,000 for the month of September, but the actual result was only £2,000, by comparing actual v budget side-by-side it should quickly become apparent where the problem is. Maybe the gross margin isn’t being made, or sales are down, or there has been an unanticipated one-off cost. Once you know where the problem is, you can drill down and identify what the problem is. If it’s a sales problem, then maybe pricing or promotion needs to be looked at; If it’s a margin issue, then it could be a wastage, or theft problem. Or it could be that your projections were unrealistic. Once you know what the problem is, you can take steps to fix it.
Of course, it is also possible, maybe even probable, that your actual results are better than the budget. That being the case, you should easily be able to see what is performing particularly well in the business and double down on that. Is a product or service offering proving to be extremely popular? You can then allocate resources and efforts into this area to capitalise on this popularity. Have you overestimated a particular cost or costs? Again, you can tweak the budget to account for this.
It’s important to remember also that budgets can throw up all sorts of anomalies that could have knock on effects that aren’t always immediately obvious. If sales are up this month, could this mean they will be down next month to account for it? If costs are down is this because a bill hasn’t come in?
You should always be willing to ask the question as to why there is an anomaly and make the changes, for better or worse, in the future budgets.
5. Create a contingency fund
All the budgeting in the world won’t make your business immune from fire, flood or pestilence. There are all sorts of problems a business owner can face that threaten to throw a spanner into the works: a broken machine, a fire, a new competitor entering the market, roadworks outside your premises, unexpectedly good or bad weather, can all have an influence on the performance of your business. Building in a contingency or emergency fund into your budget will help you survive such unexpected downturns.
Don’t be afraid to ask for help
Putting your small business budget together is fairly straightforward but it can still pay to get an expert on board. An accountant can sense check the figures and give an opinion as to whether your assumptions are correct. They can also show you how to compare your budget against actual results and give advice on what to do when variations and anomalies occur.
Need further advice?
The Acumenica team are on hand to help business owners with budget planning as well as on other matters. To arrange a no-obligation confidential chat, please complete the form on our Contact Us page or call 03330 166559.
