While 91% of start-ups survive their first year, that number will start dwindling until only 4 out of 10 will reach their fifth-year mark. With the top reason for small business failure being poor cash flow management, creating a budget is crucial in making sure your business not only thrives but survives.
In this guide, I want to look at creating a small business budget and how it will help you get a handle on your finances and understand future business growth.
The Benefits of a Budget
Creating a budget involves a lot of number crunching in order to create accurate and useful financial projections, reports and reviews. If you’ve just started a business then this may be something that is all very new to you but it’s important that you get your head round the basics.
The advantages you’ll enjoy with a proper financial budget are numerous and include:
- Prepare for the highs and the lows –All businesses encounter unforeseen circumstances that will require them to shell out money or call upon savings. Knowing your budget will shield you from going bankrupt should anything negative occur in the future.
- Forecast your expenses – You cannot guess your way into budgeting. With a financial plan in place, you will know how many more products you need to sell to cover your expenses, figure out the percentage of income that you should reinvest in the business, and find out if you can afford to hire more people.
- Be financially literate – Before you make money, you have to know how to spend it. Financial literacy is a vital skill for any small business owner, especially since keeping your business afloat depends on how much you profit you are making and where you are investing it.
- Play with numbers – With your numbers clearly laid out, you’ll be able to figure out where you can save and where you can invest more. You can test different what-if scenarios (e.g. what would happen should sales increase by 10%, what if you lose a client, etc.) and then plan accordingly.
Step-by-step Guide To Creating Your Budget
Budgeting is one of the most fundamental needs of a business, but it is also where things get complicated. Here’s how you can create one efficiently:
1. Understand the important numbers
Feeling overwhelmed is often rooted in thinking you need to know the A-to-Z of accounting. The great news is, you only need to understand the important ones:
● Profit and loss statement report
This document will give you an idea of your financial health. To find out whether you’re operating at a profit or loss, know the following terms:
- Income – The amount that comes in from sales. This includes recurring income (regular revenue from clients or customers) and expected income (forecast of what you’ll likely to earn).
- Expenses – The money that goes out to paying business costs. This includes recurring expenditure (rent, utilities, salaries) and sundry costs (occasional expenses like office supplies).
- Depreciation – Business assets that lose value over time (e.g. computers).
- Overheads – Fixed costs that you pay for on a recurring basis (e.g. gas, electricity, transport fuel).
- Debt repayment – Money that goes out to settle loans, credits, or investments.
Remember to deduct your expenses from your incomes. More revenue coming in than going out means you’re in profit. Otherwise, you are turning a loss.
At the early stages of your business, you may expect to be running at a loss, due to the amount of startup costs. Of course this is not sustainable in the medium to long term so your budget needs to accurately predict when you’ll come into profit.
● Balance sheets
Your balance sheet tells you how much you are worth at a given point in time. This document displays your assets on the one hand and your liabilities on the other.
- Assets enumerate all revenue-generating resources, such as real estate, invoices and the current cash you have in the bank.
- Liabilities refer to your taxes, loans, expenses, and your debts.
To find out where your business stands financially, deduct your liabilities from your assets.
● Trial balance
A trial balance is a single document that shows your assets and liabilities, as well as debits and credits. Think of it as an overview of all your business accounts.
2. Ask for help
At the early stages of your business, you need to be a jack-of-all-trades. With everything you have on your plate, don’t hesitate to ask for help.
Hiring a bookkeeper or an accountant will help keep your cash flow on track, remind you of any important dates on your financial calendar, provide support should there be any legislative changes (as with the case of MTD which was introduced by the UK government in 2015) and give sound financial advice to grow your business.
Time is already a precious resource, and that’s better invested in tasks that would directly impact your bottom-line rather than poring over ledgers for countless hours.
3. Use a cloud accounting software
Thanks to technology, a lot of accounting can now be automated. In fact, the UK accounting industry is on track towards more automation. Cloud accounting software like Xero can really help you get on top of your budgeting, manage your payroll, stay on top of your expenses, update your bank feed in real time and minimise the risk of errors.
These programs can also show your income and expenses in graphs and charts, allowing you to easily see trends over time and be proactive with your strategies.
Budgeting For Business Performance
Budgeting seems like a daunting task, but it’s an essential task for any new business. The best part of it is that you take the guesswork out of running your business. Knowing how much financial room you have will give you the confidence to take on risks and be more profitable. Just remember to give yourself the flexibility to adjust, should something unexpected happen.
About the Author: Andy Hyland is a certified Xero Accountant and the owner and director of AK Tax, an accountancy and tax advisory firm based in Medway, Kent. You can connect with him on Twitter,Facebook and LinkedIn.