The budget element of a business plan is one of the most useful financial tools available to any entrepreneur. Before you start trading, it can help you accurately assess the likely costs involved in getting your new business off the ground. Once your business is up and running, your budget can continue to keep you on track, by helping to ensure that expenses do not exceed income, enabling you to meet your financial commitments and plan for the future. Check out our guide on creating a budget plan for your business.
To draw up an effective budget that will serve you well in real business situations, accuracy is essential. A good budget is backed up by research, and is monitored frequently to make sure it continues to reflect reality — but that’s not to say that budgeting for startups should be a complicated or difficult exercise.
So, where to start? Here are the essentials on what your budget should include, and on how to put it to work effectively within your business.
Tracking and estimating your progress
Your budget performs two important jobs simultaneously. On the one hand, it enables you to track actual income and expenses relevant to your business: to ensure you have the cash available to operate normally. At the same time, it’s a tool for estimating future income and expenses.
Budgeting and reputation
These twin tasks of tracking and estimating the financial position are vital for any startup. They help to stop you from running into the type of situation where you are unable to pay suppliers or fulfil customer orders. So, in this way, effective budgeting is important for building and maintaining a professional reputation. It can also help you secure extra funding for your business. For example, if a bank or investor sees that you have a carefully budgeted business plan, you are more likely to be regarded as a ‘safe bet’ for investment.
Startups and budgeting: how to start from scratch
If your business has been up and running for a few months or longer, you have a head start when it comes to drawing up a budget and producing estimates for the future. You can look at sales levels so far, assess the extent to which they are increasing or remaining stable, and use this as a guide for future growth estimates.
The same goes for expenses. If you’ve already sourced suppliers, negotiated your rent, and got into a pattern of paying for everything needed for keeping your business going, you can start to make reasonable assumptions about future costs. As well as how easy or difficult it is going to be to meet them.
The importance of a business plan
But what if you’re yet to form your company and don’t have any previous figures to go off? This is why a business plan is so important. In it, you set out what you want your business to achieve and how you are going to achieve it, and the budget element of the plan is an essential element of this.
A startup attempting to put together a meaningful budget can compensate for the absence of previous trading figures by carrying out research. Market research can help you gauge likely demand for your product or service, while trade associations can give you guidance on pricing within your industry and area. From this, you can put together tentative estimates for the levels of revenue you could expect in your early days.
Identify the necessities
For expenses, it’s a case of identifying each of the elements you will need to keep your business operational. From supplies and staff through to overheads such as rent and utilities. To avoid nasty surprises further down the line on matters such as software subscriptions and the price of raw materials, you should obtain quotes from proposed providers so your budget stays as realistic as possible, right from the outset.
Drafting and using your budget
As your business grows and you have to juggle frequent transactions, it might be worth considering specialist accounting software to keep track of everything. In your early days though, the emphasis should be on keeping your budget as uncomplicated as possible — while still maintaining accuracy. As such, a simple spreadsheet can often be the simplest and most effective way of setting out your budget.
Formatting a spreadsheet
The spreadsheet should set out separate sections. Here is a break down of each:
- Online sales
- Offline sales
- Bank account interest
A typical small business budget should include:
- The estimated amount that you predict your business will receive or incur for each category during the budget period
- The actual amount received or incurred
- The difference between the two
To tie everything up, a bottom-line figure should tell you whether your business is looking at a surplus or shortfall for the budget period — i.e. whether income is likely to exceed expenses, or vice-versa.
For your budget to be put to work, it’s important to keep it updated. Transactions should be logged and included in the figures as they arise. You should also monitor the estimated amounts regularly to ensure they continue to reflect what’s actually happening within your business.
The bottom line
Monitor the bottom-line figure on a regular basis to ensure you are not at risk of falling into a shortfall situation. Your budget should also be referred to before you take on any big commitments. This could include buying new equipment or taking on your first employee.
Making better decisions
By looking at the surplus your business expects to have over, say, the next quarter, six months or year, you can make a more informed decision on whether you will be able to handle the extra outlay. Better still, if you can combine this assessment with capital budgeting, you can factor in the likely boost to income that, say, investing in machinery will generate, and factor this into your analysis, too.
From forecasting to budgeting for significant purchases, check out our help centre for tips and advice on all aspects of managing your business finances.
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