It’s no exaggeration when someone says ‘every penny counts’, especially in a business. If you’re not tracking and planning where your money is going each month, you're losing out on valuable opportunities for saving and distributing money where it will be most effective. Creating a budget for your business is the only way to see if you’re actually spending money the way you think you are; think of it as tracking calories while on a diet.
If you’re not sure where to start, this guide will help you and answer all your questions.
What is a business budget?
A budget is a plan that outlines in detail, where you will spend money, whether that be over a month or a year. You give every pound a ‘job’, based on what you decide the best use is for your business funds, and then you compare your plan against the reality of your outgoings to see how they compare.
A budget will help:
Forecast what money you will earn
Plan where to spend that revenue
Visualise the difference between your plan and the reality
What makes a good budget?
The best business budgets are flexible and simple. If circumstances change, which they regularly do, your budget can adapt to give you a clear picture at all times.
Every good business budget has seven components:
Your estimated revenue is the amount of money you expect to make from the sales in your business. It’s the cash you bring in, regardless of what you have spent to get it. This is the first line in your budget, and it is based on last year’s numbers, or industry averages if you’re a startup business.
These are your consistent costs that don’t change depending on how much you make. These can include rent, insurance, accounting services, bank fees, and utilities.
Variable costs are costs that change depending on the volume of sales and production, and these are closely related to the ‘cost of goods sold’. This could include raw materials, production costs, shipping and packaging costs, and inventory. Other variable costs can be credit card fees, travel expenses, and sales commissions.
Salaries can fall under both variable and fixed costs, for example, your core in-house team usually falls in fixed, whereas production or manufacturing teams fall within variable costs.
One-off costs are startup costs like moving offices, software, equipment, and costs associated with research and launching.
Cash flow is the money that travels in and out of a business. You have positive cash flow if there’s more money coming in than going out, this is calculated by subtracting the figure of money available at the beginning of a set amount of time and at the end. Cash flow is the oxygen of a business, so make sure you monitor it weekly to be fully on top of your finances.
Profit is what you take home after you have deducted all your expenses from the revenue; increasing profits means a growing business. If the difference between expenses and revenue isn’t where you want them, you need to rethink the cost of the products and services you’re selling and think about raising prices or boosting the money set for advertising to increase total sales.
A budget calculator
This is a really helpful tool to see where you stand when it comes to your budget planning. Using a spreadsheet helps to get all your numbers into one easy-to-read summary. In your sheet, create a summary page with a row for each of the categories in this list. Then next to each category, list the amount you’ve budgeted. Create a column to the right, for when the set time ends, use this to list the specific amounts spent in each category, which will give you an idea of your budget without having to search through layers of spreadsheets.
Small business budget types
Every good budget has a similar framework, but you will need to think about the unique aspects of your industry and how you will need to adapt your budget.
If your business has a busy season and a quiet season, budgeting is very important. As your business isn’t consistent, using a budget will give you a view of past and present data to predict future cash flow. Forecasting will help you spot trends in the year and see how much money you need to get through the quieter months. Use your quiet season to plan for the next week and to negotiate with sellers. The thing with seasonality is you can’t assume the same thing will happen every year, like, with any budget, forecasting is an evolving process. It’s a good idea to set aside some for an emergency.
The main factor when budgeting for an e-commerce business is shipping, as shipping costs can have a huge impact. Do you have the money to cover shipping costs for your customers? If not, do you have a flat rate shipping cost? Packaging can affect these rates too, so remember this when calculating the cost of goods sold. As an e-commerce business, you will also want to create the best online shopping experience for your customers, so the cost of web design, advertising, social media and product photography all fall into this category.
If you need to fill up on inventory to meet demand, factor this into your cost of goods sold. Use the sales from the previous year, or industry averages, to make a guess at the amount you will need. Do some research to make sure you’re getting the best prices to fit within your budget. You will want to make sure the volume ordered isn’t greater than the actual product demand, and consider storage solutions for leftover stock.
Budgeting for startup businesses is harder as you haven’t an existing model to work from. Do your due diligence by looking at industry benchmarks for rent, salaries and marketing costs. Ask your network what to expect to pay for fees and equipment, and set aside a bit of your budget for advisors. A few thousand pounds upfront could save you so much more in legal fees later on.
If you aren’t selling a physical product, focus on the projected sales and salary costs. Figures in these industries are much more of an estimate than product businesses, which means your budgets need more flexibility.
Making a budget is mostly an estimate, but when you can start using previous years’ figures within plans and start checking against factual numbers, that’s when budgets start to become really useful.