How To Create a Business Budget
Table of contents
We all know we need to make a budget. Going through the process of reviewing your finances gives you great insight into your business.
A business budget is an essential tool that helps you start and grow your company sustainably. Without a budget, it’s impossible to plan and control your business. You may realize that you need a bank loan or overdraft to help you achieve your aims. Having this information allows you to run your business efficiently, with the help of a Penta Business Account.
Creating a budget is an essential part of controlling your business finances, and opening a Penta Business Account, with automated accounts, and expense management features is a great start.
Why is a Budget so Important?
Before making financial decisions about your business, you need an overview of your finances. You can use create a balance sheet to find some of this information, but it’s only a snapshot. You’ll need a budget to help make business decisions, such as:
- Where you can make savings on your expenditure
- Identify your sources of revenue and where to focus on growth
- If you need investment or a business loan, creditors will want to see detailed budgets
So what do we need to include in our budget calculations?
What is your Income?
The starting point for your budget has to be your income. Depending on your business model, you may have more than one income source. A freelancer working online could have multiple income sources, for example:
- Writing content for articles
- Building websites
- Selling entrepreneur courses
- Online teaching
More traditional retail businesses may only have one income, which is all processed through the cash register.
For a new business, you will need to estimate your income. You could take your industry average as a starting point. Already established companies can base their figures on last year.
Calculate your fixed Costs
Your fixed costs are those regular expenses that don’t change very much, such as rent, accounting fees, insurance, and some utilities like mobile phone contracts and broadband. You should also include any core employee salaries under fixed costs. Salaries related to production or manufacturing teams should are recorded under variable expenses.
If your business is a startup, then you will need to estimate these figures.
Don’t forget your variable costs
The number of variable costs you have will range from a few to many, depending on your business type. Freelancers working online will probably have the least, whereas a manufacturing business will have many.
Variable costs could include:
- Raw materials
- Production and manufacturing team salaries
- Staff development
It may seem strange to include some salaries as variable costs, but the basic rule is that anything directly related to the production of goods is a variable cost. This is because there when production is increased, the costs go up through increased staff levels, overtime, or bonuses.
Listing your fixed and variable costs is relatively easy. You know from month to month what they are likely to be, and even the variable costs will change within a defined range.
One-off expenses are harder to budget for. Some you may know about, such as replacing equipment at the end of its useable life, a planned upgrade to your IT systems, or a planned office move. You should include all these planned expenses in your budget calculations.
But what about the unexpected costs? You can’t ignore these. With even the best luck in the world, sometimes things go wrong. The only way to budget for this is to put aside a percentage of your income as a buffer. The size of your buffer will vary from business to business, but if you have previous years of accounts, you could use them as a guide.
Balance your books
Using a Penta Business Account, you can take advantage of various features to help with budgeting. The automated accounting ensures your bookkeeping is always up to date, while Penta expense management ensures all those variable costs are recorded. An added bonus is the new sub-accounts feature, that allows you to put aside funds for future expenses or projects.
Creating a budget serves two purposes for a business.
- First, it shows you where your income is derived and where the business is spending money. This valuable information allows business owners to control the company finances effectively.
- Second, your budget will show how profitable the company is, and if there are problems, areas that can be changed to improve profitability.
Once you have all your figures, put them into a budgeting program, or use a simple spreadsheet, such as below:
|Costs of Goods||10000||11500||500|
Once you have the spreadsheets setup, they can be used at anytime to analyse a particular time period, and check if you are on budget or not.
Remember to link the relative cells in the spreadsheets so that as you update the figures, the totals are recalculated. This saves you a lot of time, and you can also reuse the worksheet in the future.
There are numerous resources online with example spreadsheets and templates, so plenty of help to get your budget set up quickly.
Keep your Accounts up to Date
Now you have a budget, it is crucial to keep accurate accounts throughout the year. This will allow you to compare your budget to the real figures and give your historical data for future planning.
The Penta Business Account features automated accounting to help you keep on top of your accounts and budget. If you have a team, they can be provided with expenses cards that debit the business account, ensuring you continuously keep on top of it.
Producing a budget can seem difficult, particularly for startups without historical data to use. But from the brief description above, you can hopefully see how important and useful they are.
Running a business can be stressful, with a lot of moving parts to keep under control. Staying on top of your finances is essential to your success, and there are tools out there to help.