Welcome to the ‘Davidsons GSBF Diaries’! In this series, we delve into the insights and key learnings from our recent ‘Unlocking the Secrets to Small Business Success’ event, which was a highlight of the 2023 Geelong Small Business Festival. Local business owners gathered to hear from our specialist panel on how to transform their small business and learnt about planning for success, business budgeting, reporting and accounting files, and the value of business valuations.
In this article, we discuss the importance of budgeting and how it can help you as a business owner, and we explain how to appraoch budget creation, step-by-step. If you have any questions on business budgeting or any of the other topics shared in the Davidsons GSBF Diaries, please don’t hesitate to contact our offices at (03) 5221 6399 or firstname.lastname@example.org.
Small business ownership can be both rewarding and challenging. While there are many essential tools to help you achieve success, a well-constructed budget is certainly one of the most valuable.
In this article, we explore the importance of knowing your numbers and explain how to create a budget, step-by-step.
Why should I consider making a budget for my small business?
No matter what size your business is, you need a budget. A strategic budget can hugely influence your financial well-being, giving you the clarity you need to make decisions and acting as a roadmap to help you achieve your goals.
Here are some of the key advantages of business budgets:
A budget helps you understand your costs and financial position
First and foremost, when you’re starting out in business, you need to know if you’re going to make money or not! It’s important to have a firm grasp of your income and expenses right from the beginning by creating a well-structured budget that outlines your expected income and expenses.
You’re taking on a fair amount of risk – particularly if you’re relying on the business for your only or primary source of income – and a budget provides visibility so you can make informed choices.
A budget helps you set clear and realistic business goals
With a budget in place, you can set achievable and tangible financial goals. Once you’ve got realistic goals in place, you can create a roadmap and chart a course towards achieving them. Whether the aim is to increase revenue, boost profitability, or reduce debt, a budget provides a structured plan that you can continue to revisit and revise as your business grows.
A budget helps you identify risks
You might be surprised how quickly business expenses accumulate, and even small expenses can quickly reduce your profits. A strong budget serves as an alert mechanism, helping you identify unnecessary and excessive spending before it negatively impacts your bottom line.
A budget helps you manage your cash flow
Healthy cash flow is critical for any business as you need to be able to cover your regular expenses. A budget allows you to foresee potential cash flow fluctuations ahead of time so you can proactively line up funds to bridge income gaps. This ensures you have enough capital available to manage your obligations as business operations ebb and flow.
While maintaining a healthy cash flow position is important, it’s equally important to identify any challenges in their early stages. By regularly comparing your actual financial performance to your projected figures you can promptly detect potential shortfalls, giving you time to proactively address them, and hopefully, minimise their impact.
A budget gives you peace of mind and a sense of control
Financial uncertainty can cause immense stress and anxiety for business owners. However, budgeting grants you control over your financial position so you can navigate obstacles with confidence rather than anxiety. Knowing your numbers allows you to operate with the assurance that your business is set up for success.
Budgeting is a pivotal tool that extends beyond number-crunching. It’s a strategic instrument that empowers owners to steer their businesses through financial uncertainties while working toward long-term goals. With its ability to offer financial clarity, facilitate goal-setting, and bolster resource management, budgeting is an indispensable process for driving business success.
How do I build a budget for my business?
Step 1: Gather your financial information
Start by collecting all your relevant financial data, including your revenue sources, expenses, and any existing debts. This information forms the foundation of your budget and ensures accuracy in your projections.
Step 2: Set clear financial goals
Define your business’s financial objectives. Are you aiming for increased revenue, higher profits, debt reduction, or expansion? Your goals will shape the way you allocate your resources in your budget.
Step 3: Categorise your expenses
Break down your expenses into categories such as fixed costs (rent, utilities), variable costs (inventory, marketing), and one-time expenses (equipment purchase). Categorising your expenses helps you understand where your money is going and plan accordingly.
Step 4: Estimate your income
Based on your historical financial data, estimate your income for the upcoming period. If you don’t have historical data, try and build your income from activity you can generate. This could be the number of products you can make or sell per day, or the number of consulting hours you can charge per day. Be realistic and conservative in your projections to ensure that your budget remains achievable.
Step 5: Project your expenses
Using your expense categories, project the amount you’ll spend in each category for the period you’re budgeting for. Consider both recurring and occasional expenses, and don’t forget to account for unexpected costs.
Step 6: Factor in seasonal fluctuations
Many businesses experience seasonal variations in revenue and expenses. Consider these fluctuations when creating your budget to ensure you’re adequately prepared for both busy and slow periods.
Step 7: Allocate resources to goals
Distribute your projected income among your various financial goals. Allocate funds to cover expenses, repay debts, and invest in growth initiatives. Prioritise your goals based on their importance to your business.
Step 8: Create a cash flow projection
Construct a cash flow projection by comparing your estimated income with your projected expenses. This will help you understand when cash will be coming in and going out, allowing you to plan for any cash flow gaps.
Step 9: Regularly monitor and adjust
A budget is not static; it’s a dynamic tool that requires ongoing monitoring and adjustment. Regularly compare your actual financial performance with your budgeted figures. If there are discrepancies, analyse the reasons and make necessary adjustments.
Step 10: Use budgeting software or tools
Utilise budgeting software or tools designed for small businesses. These tools can streamline the budgeting process, provide visual representations of your financial data, and simplify tracking and adjustments.
Step 11: Seek professional guidance
If budgeting seems overwhelming, don’t hesitate to seek assistance from your accountant or financial advisor. Their expertise can provide valuable insights and ensure the accuracy of your budget.
Creating a business budget is an investment in the financial health and success of your business. By following these steps, you’ll gain better control over your finances, make informed decisions, and work towards achieving your financial goals. Remember that a budget is a living document; regularly revisit and refine it to keep your business on track and prepared for any financial challenges that may arise.
Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.