Business budget planning is so important for small business owners.
A comprehensive budget can guarantee success for your business. It gives you a clear picture of where your business is succeeding and where improvements can be made.
In this article we’ll explore what a budget plan is, how to create one, and how to review it.
Budget planning doesn’t have to be complicated or stressful. Having a working budget can make a huge difference to your goals and development.
What is a budget plan?
A business budget plan is a roadmap that outlines your company’s expected income and expenses. This gives you a clearer picture of your overall business performance.
For small businesses, this includes things like the cost of raw materials, the pricing of products or services, and the overall financial health of the business. It goes beyond just tracking business expenses; it offers an opportunity to assess your business's health over time and project future financial outcomes.
To project cash flow and profit, a careful analysis of past financial records is needed. So the sooner you start keeping good records of costs and sales, the better.
Analysing accounts from the previous month, quarter and year shows patterns in sales volume, expenditures, and overall financial trends. These trends can help you make important decisions around improving profitability, cutting costs, or growing into new areas.
Why do you need a budget plan for your small business?
Budget planning in business is not a one-time task but an ongoing process. Whether you’re a startup or an established business, a budget acts as your compass through the uncertainties of the market.
It’s a living document that requires constant updating, providing you with powerful insights through year-on-year comparisons against projections.
Your budget is not just a financial tool, it’s a strategic guide that instills confidence in your business decisions. It empowers you to make informed choices based on a thorough understanding of your financial situation.
How to create a budget plan
Crafting a robust small business budget involves several key stages. Follow these simple steps when planning a budget:
1. Examine and understand your revenue
Your revenue is what allows your business to succeed, and understanding where it comes from, how regularly and whether you’re reaching expectations is the first step. Understanding seasonal changes or other impacts will help you look long term.
Review income streams: Identify all sources of revenue, such as sales, services, investments, or other income streams.
Analysis: Scrutinise financial records to understand patterns and fluctuations in revenue on a monthly, quarterly, and yearly basis.
Forecast future revenue: Use historical data to make informed projections considering market conditions, customer demand, and industry trends.
2. Subtract fixed costs
Fixed costs are those that consistently occur each month or year. You expect to pay them as part of allowing your business ton run. This includes staff wages, rent, insurance etc.
- Identify fixed costs - List all regular expenses like rent, tax, insurance, and staff salaries
- Assign values - Ensure accurate and up-to-date numbers for each fixed cost
- Subtract from revenue - Deduct total fixed costs from projected revenue to understand funds available for variable costs and profit
3. Determine variable expenses
Your variable costs are the ones that change, depending on how your business is doing. They are also sometimes down to your personal choice. You might choose to spend less on marketing during busy periods, for example. Allocating an amount of money for these costs in advance, even if you don’t use them all, protects your bottom line.
- Categorise variable expenses - Identify costs that fluctuate based on business activities, including marketing, raw materials, and production costs.
- Estimate variable costs - Estimate numbers associated with each variable expense category based on research or historical data
- Allocate funds - Allocate budgeted funds to cover variable expenses, leaving room for flexibility
4. Put aside money for unexpected expenses
No one knows what the future holds. Having a portion of your budget available incase something unexpected happens is just good planning. You never know if you’ll deal with broken machinery, losing a key staff member or an unexpected legal case.
- Identify potential risks - Anticipate unforeseen expenses such as equipment breakdowns, legal fees, or sudden market changes
- Create a reserve fund - Set aside a portion of your budget as a reserve fund to address unexpected challenges. This is also sometimes called an emergency fund
- Regularly review and adjust - Regularly review and adjust the reserve fund based on evolving business needs and risks
5. Have a profit and loss statement
P&L is a standard way or showing all the income and expenses in one place. It then allows you to make clearer projections for future income using this data.
- Compile financial data - Create a comprehensive profit and loss statement by compiling all revenue and expenses
- Analyse profitability - Understand which aspects contribute to profitability, identifying areas for optimisation or cost-cutting
- Use for future planning - P&L is a valuable tool for setting financial goals and making informed decisions
6. Make future budgeting predictions
Making predictions doesn’t mean guessing - use the data you’ve compiled in your budget so far to identify some key factors. If you know your work is seasonal, if you can see the impact of a sale or an influencer collaboration, or the popularity of a certain product, this is where your P&L will tell you what works, and you can project that across the next year or two.
You may also want to take into consideration wider context - are any changing laws or government budgets going to impact your business or your audience in the coming years?
- Project future income and expenses - Use insights from the profit and loss statement to project future financial landscapes
- Set realistic goals - Establish financial goals based on projections, including revenue targets, cost reduction objectives, or investment plans
- Regularly update predictions - As your business evolves, regularly update future predictions to align with the dynamic business environment
By following these steps, businesses can create a robust budget that serves as a tool for financial management. Remember, budgeting is an ongoing process, and regular reviews and adjustments are crucial.
Reviewing your budget
Your budget needs to be a regularly consulted and reviewed document. You should be updating it with your weekly, monthly and quarterly sales figures, as well as updating any increase in costs when you renew with or change suppliers.
You budget will help guide you in what your focus should be in the year ahead. Is it about utilising that marketing budget to bring in more revenue? Is it about cutting costs with your raw materials? Should you consider moving premises if you need more space to reach capacity for sales, or can you do with less and save money on commercial property?
Updating and checking in with your business budget will guide your decisions. Make sure your management team know how to take insights from your business budget, and be sure to regularly refer to see if the changes are having an impact.
The budgetary control process
- Establishing actual position - Understand your current financial standing.
- Comparing actual with budget - Regularly compare actual financial data with existing numbers.
- Calculating variances - Identify differences between actual and budgeted amounts, highlighting potential financial discrepancies.
- Establishing reasons for variances - Uncover the root causes of discrepancies to address underlying financial issues.
- Taking corrective actions: Implement necessary measures to rectify financial imbalances and steer the business back on course.
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While delving into the world of spreadsheets and numbers may not be the most exciting aspect of business ownership, it’s crucial to keep your venture running smoothly. This is evident in the significant contrast in success rates between businesses with and without budget plans.
Setting up a business doesn't have to be complicated. To speak to one of our expert corporate business lawyers, book a free 15-minute call or by calling us on 020 3808 8314.
