The majority of small businesses are started by people with a strong passion for the enterprise that they have expertise in.
But passion and expertise are not enough to ensure a successful business. And as a result, approximately 50% of small businesses fold within 5 years.
What is a budget?
A budget isn’t limited to reducing spending. It is also a tool you can use to measure your profitability while predicting future needs. That said, creating a budget can help you manage financial difficulties right now. Financial mismanagement, and in particular not having accurate and timely insight into your budgeted and actual cash-flow, is one of the most common reasons for failure.
A budget is like charting a course for a boat through a rocky channel. The sooner you can identify that you are off course, the sooner you can take corrective action in order to avoid inevitable disaster.
“A debt problem is, at it's core, a budgeting problem.”
- Natalie Pace, The ABCs of Money
To help you get on top of your business finances we have prepared 9 tips to help you create an effective budget for your small business.
1. Just do it
Even if you don’t think you need a budget, you do. Even a spreadsheet is better than nothing. Or consider Accounting and Project Management software and utilise the inbuilt financial features offered. Xero has some great tools to help you tailor budgets and financial reports to suit your business. And if you perform ‘job’ type work, WorkflowMax can help you understand the profitability of your jobs on a moment to moment basis.
2. Your budget is a working document
Consistently revise your budget figures as your business changes and grows. Ideally, revise your budget monthly, especially when you are getting started.
3. Start with the easy stuff
Focus on the information you have first such as fixed costs and confirmed income. If you are expecting or planning for significant growth, separate the budget into two sections. The first section should focus on actual costs. For the second section, focus on growth related calculations. This will allow you to adjust growth related calculations without impacting your actual costs.
4. Make sure you include your own time in the costs
Don’t think of profit as your compensation. Chances are that you will be working for twice as long as you bill anyway. Include a market salary for yourself in the budget. Your true business profit is then what the business pays you over and above your market salary.
You know what income is coming in already and the direct costs that will be incurred in order to generate that income. Take the time to calculate how many more jobs you will need to cover the ongoing fixed costs in your budget. As you add these in, keep an eye on the effect this has on other costs. For example, do you need to hire more staff or increase the size of your office/factory?
6. Take notes
Take notes as you are adding items to the budget. A figure might make sense when you add it in, but in 6 months time, when someone else looking at the budget they might not understand. For example, an increase in material costs from a supplier or an increase in the cost of the office lease.
7. Add a safety margin in the budget
Unexpected events or forgotten items always come up. As a business owner it’s important to prepare for these. We recommend aiming for a 30% margin as a safety net to save you from unwanted surprises. If you don’t end up needing the margin that means more profit for your business!
8. Utilise your Accountant or Bookkeeper
Accountants and Bookkeepers are valuable assets to your business. By utilising their skill set you can get a clearer idea of how your business is performing while focusing on your strengths as a business owner. If you need help finding an Accountant or Bookkeeper, Xero have created this small business Bookkeeping and Accounting directory to help you.
9. Don’t hate the process
It can be overwhelming working through your budget. But you can learn to love the control that you will have over your business, when you have the insights that tracking a budget can give you.
The trick is to remind yourself why you are creating the budget in the first place and how it can help you achieve your dreams. Or avoid disaster. A budget can quite literally be the difference between success and failure.
We hope these tips were of use to you and we look forward to hearing how they help you.
Do you have any budgeting tips to share with other readers? Share them in the comments below.