A healthy business depends on its finances. And managing your finances successfully means developing a budget that works for your business. In fact, some entrepreneurs would say that your budget is the cornerstone of your business. While a budget is obviously useful for keeping you in the know when it comes to cashflow, it’s also there to help you make informed decisions, identify when it’s time to cut costs, grow revenue or invest in the business.
Here are the four main steps to go about creating a budget that works for your business.
Add up what you have coming in
The two main components of any budget is income and outgoings. Start by listing your revenue streams and how much you expect these to bring in. While your income will vary from month to month, be as realistic as possible.
If you haven’t been in business long enough to figure out a monthly average for income, it can be beneficial to be overly-conservative in your estimate as this may give you some headroom in the event of an unexpected drop in business revenue. The longer you’re in business, the easier it will be for you to see fluctuations in revenue due to seasonal demand and other factors. This will be critical information when planning ahead for the leaner months.
Remember to calculate for total revenue, not profit. That comes later.
Subtract what’s going out
Outgoings will fall into several categories, including fixed costs, or the bills you know you have to pay each month (and how much they are). Rent, utilities such as Internet/fixed phone charges and any loan repayments are good examples of fixed costs.
Next, there are variable costs, or expenses you are expecting, but can’t be fully quantified as they vary from month to month. These include items such as electricity/heating and travel expenses. It’s a good idea to add these up each month over a period of time, so you can come to a realistic monthly average going forward.
You also need to consider one-off expenses, such as those for an emergency purchase or repair. These can be very difficult to cost, so it’s a good idea to put a regular amount each month into a ‘sinking fund’. That way, you’re prepared when the unexpected happens and the money is there to help you cope.
Balance the books
Now it’s time to balance your revenue with your outgoings. This lets you forecast your cashflow and (hopefully) your expected profitability. This is also known as your Profit & Loss (P&L) statement. If the figures don’t add up, then it might be time to go back to the drawing board and see where savings can be made or new revenue streams can be added. Straightaway, you’ll be able to see how having these figures can help with decision-making when it comes to your business.
Make your budget work for you
Once you have your basic budget in place, there are things you can do to make it more effective, so it helps you manage your business finances better. Your first step here should be to invest in technology that can help automate the budgeting process. That way you don’t have to spend too much time on it each month. Here, it’s important to use a software package that works best for the size of your operation, as well as your business model.
Of course, there are other technologies that can help with your finances, such as getting an online business bank account with a company like KoalaPays. With an all-digital payments platform, you can easily make money transfers, convert between currencies, manage your money and even use our online Payroll system.
It also allows you to process payments from customers. This can be set up in a way that integrates with your existing systems and makes it easier to manage your overall finance function.
Depending on the size of your business, perhaps the best way to create the most effective budget is to hire an accountant. This has the added benefit of making sure that you don’t fall foul of the law when it comes to tax compliance.
Few business owners like dealing with budgeting and accounts, but it‘s something you have to get to grips with if you want your business to succeed.