Budgets help you to raise capital, manage your money and plan for the future, and are vital tools for a small business or start-up. As your business grows, good budgeting keeps you in control and on track to meet your objectives. Here’s a handy guide to preparing a budget...
A budget is a fundamental business planning tool that enables you to:
- ensure that you have the money for future activity
- control finance
- make sound financial decisions
- have an early warning system for any problems
- track your progress and make necessary adjustments.
Businesses need to rely on solid figures, not guesswork. The basic objective of a budget is to make your total income for a given period greater than your expenditure so that your business achieves a profit.
There are two approaches to drawing up a budget. If your business is already up and running you can budget historically, using past performance figures from your profit and loss account, balance sheets and previous cash flow forecasts. But with little or no historical data to draw on, new businesses usually start with a blank sheet to draw up a zero-based budget based on required profits. Read our introduction to business planning for more help with this.
Building your budget
First, list your objectives and set specific targets. Decide on the period you are going to budget for. Weekly or monthly for a year is a typical timescale. A simple computer spreadsheet can be very helpful here.
Next decide on your approach. If you opt for historical budgeting, you can project costs and revenue and calculate profits based on past figures. This method is more suited to businesses with a track record rather than start ups.
Alternatively, use the zero-based required profits approach: enter your projected expenses, then calculate how much profit you require. This will tell you how much revenue you need to generate.
Divide your expenses into:
- your fixed costs eg rent, loan repayments, business insurance
- semi-variable costs eg utilities and employees’ wages
- variable costs, which fluctuate in line with sales and include the cost of materials and distribution.
If you are a start-up you will also need to include initial costs such as the purchase of office furniture and IT equipment.
Projected revenue should be broken down into how many units – of product, time or service – you need to sell and at what price. This will enable you to set monthly sales targets. Again, be conservative in your estimates and especially take into account likely monthly or seasonal fluctuations. See Pricing your products and services for more advice on what you should charge.
When you have done your calculations, add up the total sales value for each month, and do a total for the year.
Making use of your budget over time
Once you have drawn up your budget, use it smartly. Compare your projections with the actual figures every month. If they differ, ask yourself why and adjust your budget continually to reflect the real figures. It’s when your budget tells you that you need to change what you’re doing – for example, cut costs or focus more on developing new business – that it’s most valuable.
How uSwitch for business can help
Read our guide to pricing your products and services
Read our guide to forecasting and planning for small businesses