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What is budgeting?

To ensure you meet your business goals you’ll need to keep track of your spending: this is where budgeting comes in. Here we provide information on how much time is required to produce a budget and what the ongoing benefits of maintaining a budget is to the small business owner.

What is budgeting?

Budgeting is a process of looking at a business’ estimated incomes (the money that comes into the business from selling products and services) and expenditures (the money that goes out form paying expenses and bills) over a specific period in the future. It allows a business to see if they will be able to continue operating at their expected level with these projected incomes and expenditures.

A budget is often drawn up for a financial year and contains information about anticipated sales and associated business costs within that period.  By using this budget a business can see how well they are expecting to perform within the year and actual performance can be monitored against this original proposed plan.

Why is budgeting important?

A budget will help you see what money is coming in and out of a business.

For a start-up it will show the total costs needed to get the business off the ground.

Budgeting is important as it allows a business:

  • to see if enough money is being made and to continue to fund it
  • to allow for future growth or expansion
  • to generate income to pay the owner(s). 

If a business doesn’t have a budget to work to then it is possible that they may be spending more money than is being made, meaning that the business will be running at a loss.

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Performance

Find out more

A budget means you can check performance against a plan and it can highlight areas of concern, e.g if you are spending too much you can make adjustments by making some cuts.

If a budget shows that predicted sales revenue (the amount from selling goods and services) is barely greater the direct cost of those sales (i.e. the purchase of materials) then this will highlight a problem as it is unlikely that the business will be able to cover additional indirect costs such as rent, rates and utilities.  Without a budget these issues may not be fully understood.

Once a business moves into a growth phase it will also show if it’s underinvesting and this can have a negative impact on their ability to compete.

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How do I get started on budgeting?

It is useful to start by thinking about the different products the business is going to sell and the prices you are expecting to sell these items at. You may want to offer introductory discounts to your customers to make them aware of your products to begin with, so make sure you consider this. Also consider other discounts you may offer.

Be realistic when you are doing your budget about how many products you think you will actually sell each month, not what you want to sell each month. Speak to other people working in the same field to get an idea of realistic sales volumes and also think about your own capacity e.g. what is the maximum number of units you could produce during the month using your initial resource – remember you only have so many working hours each day. We have created a Budgeting template to help you – to access a copy scroll down to Downloadable template: Can software help with budgets? below.

It is important to factor in all of the costs the business may incur and not just the obvious ones such as materials and rent. E.g if you are going to have meetings with new clients, where are these going to take place? How will you get there? Who will pay for the coffee? All of these costs will need to be budgeted for to ensure you stay in control of your costs.

Costs can usually be split into two categories: fixed costs and variable costs.

  • fixed cost is a cost which will stay the same for that period regardless of how well the business performs e.g rent and business rates. These won’t increase with increased sales. Of course, many of these costs will have a cap in the long term i.e. once sales exceed a certain point regularly, you may need to rent larger premises. These costs will need to be covered by income if you are to break even.
  • Variable costs are costs which vary with the number of units you produce e.g. material, postage costs and labour (if people are paid on a per unit basis). Therefore it is important to carefully predict sales and production volumes when doing your budget. The ‘Budgeting’ template will be useful to get you started. Don’t forget to include larger items such as tools and equipment; these will all need to be budgeted for.

How long does budgeting take?

The length of time it takes to complete a budget will depend on:

  • the size and complexity of the business
  • the availability of information
  • the length of time that the budget is being prepared for. 

It need not be complicated, a simple but thorough budget detailing what a business expects to earn and spend in a set period may only take a couple of hours to complete and this time invested may save a business time and money in the long term. 

How often should I prepare budgets?

Businesses often prepare budgets annually but many smaller businesses benefit from preparing budgets for a shorter time period. Once a budget has been made, you should stick to it as far as possible, but review and revise it as needed. 

Budgets should be updated regularly to reflect changes in the business, such as pricing fluctuations, expansion, new products, change in suppliers, etc.
Progress should be monitored against a budget so that variances  (the difference between a budgeted, planned or standard cost and the actual amount made or sold) can be looked into and the causes of these can be identified. If variances are caused by incorrect assumptions then this new information should be made use of and reflected in the budget for future months.

How often you chose to prepare your budgets will be dependent on your business. It is likely that budgets prepared for longer timeframes will become less accurate due to a variety of external factors that may influence the business so your budget should be reviewed and updated regularly.

What budgets do I need to prepare?

A budget will show estimated income (money coming in) and expenditures (money going out) for future periods. A small business is likely to have one overall operating budget which sets out how much money is needed to run the business over the coming period.

An operating budget is a combination of known expenses, expected future costs and forecasted income.

A business’ budget should include:

  • projected sales (the amount of money a business expects to make at some in the future)
  • direct costs (materials, labour and expenses related to the making of a product)
  • fixed costs or overheads (business expenses such as rents or salaries

A budget may also contain:

  • Working capital forecasts
  • Fixed asset purchases
  • Cash flow forecast
  • An estimate of financing needs such as predictions of loans.

As a business grows, the total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

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Once you have figures for income and expenditure, you can work out how much money you’re making and can look into costs and work out ways of reducing them. 

You can see if you are likely to have cash flow problems, giving yourself time to do something about it.

A budget should take into account a number of factors such as any changes that you want to make to your business, changes to the market and your customers and your objectives and goals for the year. 

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital.

If you should need help with your budget planning it is advisable to contact an accountant for advice. Find an accountant or bookkeeper here.

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Will budgets help me save money?

The key benefit of budgeting is that it allows you to focus on the cost of running your business and gives you the opportunity to review performance and factors affecting your business. 

This process can give you a greater opportunity to anticipate problems, make continuous improvements and provides clarity and focus on your finances.  This can lead to better cost control and save your business money.

Downloadable template: Can software help with budgets?

There are many different online tools, apps and software packages designed and developed to assist a business with their budgeting process. These vary in cost and complexity and a business can review these options and select the most appropriate for them. Enter ‘budget apps’ into a search engine online to look for an app that suits your needs. 

Spreadsheet software such as Microsoft Excel may be a simple and equally useful tool to help with budgeting as information can be entered, changed and presented easily and clearly.  There are plenty of business budget templates available online for you to use. By searching for a ‘business budget template’ online will give you plenty of options to choose from. A template will contain all the relevant information to help you build your budget. All you need to do is fill in your estimates in the relevant fields. 

By investing some time in setting up a budgeting template within a spreadsheet you can create a useful tool that can be updated regularly and can quickly show the impact of changes to sales or spending levels on your business’ projected profits for that period.

We have created a budgeting template to help get you started – click on the button below to download a copy. 

Download: Please login or register to get your download.

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Interactive tutorial: Budgets

Find out more about budgets in this short tutorial. We look at:

  • What role a budget has within a small business
  • The types of budgets used
  • Who is responsible for writing a budget
  • Creating a simple online budget
  • Forecasting and reforecasting.

Click on the start button below to begin. 

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