Before we get into things, let’s first take a look at what a business budget is and why it’s essential to start creating one.
What is a business budget?
Budgeting is an essential part of business planning. It empowers business owners with full insight into their current financial situation and what actions they need to take to meet their short and long term financial goals. A business budget outlines all of your anticipated income and expenditure, as well as your profitability, over a defined time period - whether monthly, quarterly and/or annually.
With a detailed roadmap like this, you’ll be able to identify where to cut unnecessary spend, and where to refocus your money to have the most beneficial impact on your business. A budget will help you take control of your business finances and make faster, better-informed decisions on how to tackle potential future challenges and grow your business.
Whilst it’s common for new and small business owners to put off building their budget, the sooner you get started, the sooner you can start guiding your business towards financial success and scalability.
Ready? Let’s get down to business!
6 steps to creating a business budget
1. Prepare yourself
The first step is to prepare.
Decide upon a system: What will you use to build your budget - are you already subscribed to a financial accounting software, such as Xero, that’s suited to the purpose? If not, a spreadsheet is likely to be the best solution to get started.
Set up the chosen system for your budget, allowing space to map out each of the elements outlined in steps 2-5 below, and set an appropriate timeframe that makes sense for your business. This can be monthly, quarterly or annually, or could track all three in one budget plan - either way, keep in mind that for maximum impact, your budget will be reviewed and updated on a monthly basis, comparing your plan with your real life results, and adjusting it as appropriate.
Gather your data: Next, pull together all of the financial statements and reports you’ll need to outline your expected income, expenditure and profit for your chosen timeframe.
Take Action: Regardless of how long you’ve been trading, how much information you have available to you about your business finances, or what you know about budgeting - get started! Take action from whatever position you’re currently in, and the clouds of mystery will start to evaporate.
2- Outline your estimated income
Begin to map out your estimated income - how much revenue you expect to receive within the defined timeframe - and from where. The sales information on your Profit and Loss statement, and your sales pipeline is a great place to start. Then consider what other sources of income you may have in the upcoming period that may not yet have been accounted for, and outline them on your budget plan. Total all of your expected income for the period.
If you’re just starting out, why not begin by setting some sales targets that are reflective of your existing business situation, then work out your expected income based on these, alongside the cost of your products and services.
3- Outline your fixed expenditure
Next your fixed expenditure - this is your regular outgoings that will show up on your statement month after month, and are generally the same amount each time. It may include items such as rent and service costs. Your bank statements and accounting reports can help you work out all expenditure for your business, but don’t forget to consider any new contracts you’ve signed, or wish to sign in the upcoming period, that will result in new ongoing fixed costs. All of these will be outlined in this section of your budget.
4- Outline your variable expenditure
Variable expenditure is different from fixed - it is the expenditure that varies in amount from month to month, based on your business needs and activity. It may include utility bills, printing costs and office supplies. Total all variable expenditure for the timeframe.
5- Outline your one-off expenditure
Outline your one-off expenditure - these are the spends you don’t make very often, and sometimes pop up unexpectedly. They may include repairs or new equipment costs. Total all of your one-off expenditure for the period.
6- Calculate your profitability
Now that you’ve mapped out all of your expected income and expenditure within your budget plan and have calculated the totals for each area, you can calculate your profitability. To do this simply compare your total income with your total expenditure - this will reveal your profit for the defined time period.
Now that you’ve built your budget plan, you have all the insight you need to start making some highly impactful financial decisions for your business, and keep the rest of your team on track.
Click here to book a working session with Pyramis Solutions. We can help you build a budget that’s tailored to your business or offer valuable insight into how to make the most out of your current plan.