One of the key differences between businesses that succeed and those that do not is having a detailed budget plan. Proof of this is in the findings that of over 80 failed companies, 50% did not have a budget plan.
In this article, we set out how to create a budget plan for your small business so you can strategise for success.
What is a business budget plan?
A business budget plan is similar to a personal budget, which sets out your organisation’s expected incoming revenue and outgoings.
To predict your cash flow and profit, you will need to examine your accounts from last month, last quarter, and, if possible, last year. This will allow you to identify a pattern in your business sales, expenditure and finances.
What is budgeting in business?
Budgeting in business is a process of looking at a business’ estimated incomes and expenditures over a specific future period.
Why is budgeting important for a business?
A business budget will help you understand the ebbs and flows of your cash flow so you can plan for slower months and know the best times to re-invest profits to grow. Budgeting puts you in control rather than being left at the mercy of market forces.
How do I create a business budget?
The business budgeting process starts with looking backwards at your past income and expenses.
The longer you’ve been in business, the easier this process will be, as you’ll have more data to look back to create your budget.
To create a business budget, you must:
- Examine and understand your revenue
- Subtract fixed costs such as rent, tax, insurance, and staff salaries
- Determine your variable expenses or variable cost, for example, your salary, capital expenditure, marketing costs, and utilities
- Put aside money for unexpected expenses
- Have a profit and loss statement
- Using your profit and loss statement, make future budgeting predictions
Whether you’re a small business that just started its journey or you’ve been doing this a while, projecting what will happen to your business in the future and setting goals for your business to perform is best practice.
Once you have created your P&L (Profit and Loss Statement) showing your business's past, you can start building your budget.
For this step, referencing your P&L will help you better understand your business's seasonal ups and downs, which investments in your business are worth repeating, and what you should avoid in the future.
What is a budget control?
Budget control is the financial jargon to refer to managing income and expenditure.
In practice, it means regularly comparing actual income or expenditure to planned income or expenditure to identify whether or not action is required.
The budgetary control process
To ensure effective budgetary control, you must monitor and manage your budget.
The process of controlling budgets can be broken down into several steps:
- Establishing actual position
- Comparing actual with budget: the information obtained needs to be compared to the budgeted numbers, usually set at the beginning of the financial year
- Calculating variances: Referring to the difference between actual money and the budget. This may indicate your cash inflow is lower than planned in the budget
- Establishing reasons for variances: The reasons for all variances need to be identified.
- Taking corrective actions
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Most business owners are unenthusiastic about budgeting and spreadsheets. After all, these are not the most exciting parts of entrepreneurship.
However, if you do not get your finances under control, you run a massive risk of running out of money, especially if you are presented with an unexpected bill or large tax payment.
Creating and updating a business budget from day one will ensure you have enough money to pay for marketing, product testing and hiring new talent to meet your commercial ambitions.
It puts you in charge of your destiny and will allow you to run your business with confidence.