A complete guide to small business budgeting

Although it may seem like a scary, complex undertaking at first, once you know where to start and what to do, the crucial elements of budgeting are invaluable. Here, we’ll run through the importance of budgeting for small businesses, its benefits, the various approaches you can take and a step-by-step guide to the process.

What is business budgeting?

Budgeting is a process in which future income and spend are decided in order to streamline the expenditure process. By doing so, budgeting serves as a monitoring and controlling method to manage the finances of a business, so that money can be spent more effectively and efficiently.

Some considerations for small business budgeting

Before you create a budget, there are a few things worth keeping in mind when you prepare.

• Create a spreadsheet: Your budget will need to be viewed, updated and reviewed throughout the year, so you’ll need to keep a spreadsheet close to hand. Creating such a document will allow you to refer to it when negotiating terms with suppliers, contractors and advertisers, and evaluating options for small business financing.

• Break down your years into months: Since a budget is supposed to be the expected future financial performance for a business, it provides more direct control over things if you break down your annual totals into months.

• Compare what you’ve budgeted for against actual amounts: Each month, you’ll budget an amount that you’ll compare against the actual performance for that month. Any discrepancies between the two numbers (whether they’re red flags or not) will signal where you need to make changes, allowing you to plan for the remainder of the year.

What are the benefits of a business budget?

The budgeting process is crucial for any business, regardless of sector. The importance of budgets can never be understated, offering many benefits – take the below reasons, for instance:

• Budgets can set targets: Budgets serve to ground the business in achievable, controlled targets, serving up a guideline by which operations should be run. Through setting targets for cost and revenues, targets can then be properly achieved.

• Help to facilitate strategy: A proper budget can help to formulate the capital expenditure plans of the business. The level of funding is the first thing to look for when it comes to budget preparation, as it determines the types of capital expenditure that a business chooses. By knowing the budget in advance, strategies can be finalised ahead of time.

• Emphasises priorities: When allocating budget across teams and divisions within the business, it demonstrates its priorities. For instance, if the sales department receives a large budget then clearly there’s an emphasis on sales and distribution.

• Serve to control spending: Without a budget, a business lacks the ability to keep track of its expenditure. Outlining the expenditure, however, allows the budgeting process to control spending. This allows organisations to predict where the business may be heading, a benefit that would have been impossible without a proper budget.

• Provides a profit margin: Budgets can provide businesses with forecasted financial statements so they can track their profit margins. Doing so determines whether it will be profitable to run the business’ operations in the future. If the business isn’t generating profit, then it still has sufficient time to adjust its revenue and costs. Without a budget and without generating profit, a business cannot hope to survive for long into the future.

A step-by-step guide to business budgeting

• Work out your sales revenues: A good place to start with budgeting is setting some sales goals. This will help you determine how much you want to earn before you start, helping to calculate how many units you may need to produce or how many clients you need to serve, for instance.

• Factor in production volume and cost: The cost of production will show you if you have set your revenue goals too high or low. Production volume is the number of units a business has to produce to meet its sales goals, as well as the total amount you can produce in a period. Production costs are the costs that relate to the production of goods or services, such as materials, wages and overheads. You’ll have to balance sales revenues and production costs until you find what works for you.

• Stay abreast of operating expenses: Expenses that relate to running the office or sales and marketing expenses such as advertising and material costs will also have to be factored into the budget.

• Keep your cash in check: How much cash do you have and how much will you need to have? Cash or equivalents (such as money orders or bonds) allow you to pay your expenses, while cash statements let you see where your money is going. This can let you determine how much cash you need to cover short-term liabilities.

• Emergencies: Don’t forget about keeping an emergency fund in the event of the unexpected. These funds tend to be placed in your retained earnings on your balance sheet, the earnings that are kept after all expenses and liabilities are paid.

• Predict one-time expenditure: Your budget also puts you in the position to be able to factor in one-off purchases. While you can’t plan for such spending sometimes (e.g. if your computer goes bust and needs a replacement) others can be budgeted for months in advance such as company nights out.

• Put it all together: Here’s where the spreadsheet we mentioned earlier comes in. Handily, there are plenty of ready-to-use business budget templates out there that can help you keep track of your figures.

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Tips and hints to help with creating a budget

• If you don’t have the time, or find the task of wading through your financial records to pull together the data particularly daunting, try not to rely on estimating costs. Instead, a quick and more accurate way to build a small business budget is through the use of accounting software. Such tools can automatically record your income and expenditure, so you don’t have to manually gather the information.

• Additionally, you may want to seek the help of a bookkeeper or accountant to doublecheck the numbers and help you make realistic predictions about business growth, upcoming expenses and tax issues. They’ll also advise you on what to do if the actual numbers differ from those you’ve predicted. Although they charge for their time, these experts will usually save you far more than they cost.

• Once you have a basic budget, you can test out different scenarios by playing with the numbers. There are all sorts of variables you can try out, and it’s a good way to see if you can weather certain situations if they were to happen in reality. Consider putting your budget in the context of the following situations, for instance:

• What if sales were to go up by 10%?
• What if you lost your biggest client?
• What if your rent was lower?
• Can you afford to hire more staff?

Gazprom Energy is a leading and award-winning business energy supplier, helping thousands of small businesses manage their gas and electricity contracts. To find out more about what we can offer your business, visit the homepage or call us today on 0161 837 2295.

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