6 steps to easily create your business budget
A budget is an essential management tool for any business. It contains the estimated income and expenses for a certain time and details how the over-all plan for the business will be financially executed. It also allows you to plan for future events such as purchasing a piece of equipment or attending a conference or seminar.
To create a budget there are six steps I recommend you work through.
Steps to easily create your business budget
Step 1 – Write down all of your business expenses
In order for your budget to be useful it needs to include all of your business expenses. You can find this information in your bookkeeping system. If you don’t yet have that kind of system then review your bank statements from the last 12 months to create a list of what you have spent money on. Don’t forget to include the expenses that you have paid for using cash (hopefully you have a receipt).
Be clear on what the minimum expenses are to keep the lights on and doors open for your business, and where any expenses are “nice to haves”.
Then consider:
Are there any expenses that you don’t pay every year, e.g. you might pay the hosting fees for your website every two, three or five years?
Are there any business expenses that you've been paying from your personal account? Include those in your budget, then ensure they’re paid from your business account in the future.
Are there any other expenses that you want to include, e.g. professional development that you must do to keep your industry registration or one-off conferences?
As you compile the list of expenses make a note of when you pay them, e.g. every month or in June.
Step 2 - Calculate your minimum income
Work out the income that is needed (before tax) to cover your minimum expenses – that is when the net profit (income less expenses) is zero. Also, work out the extra income you’d need to cover those “nice to have” expenses.
Step 3 - Calculate your minimum hours
Work out the minimum number of hours you, and your team, would need to work to cover your budgeted expenses. If your hours are too high compared to where you want to be, then you may need to budget in an extra team member. Add this team member to the expenses in Step 1 as well as to the minimum hours.
Your time input for the business won’t go into the budget but it does provide a reference point for whether your budgeted expenses are realistic.
Step 4 - Calculate your maximum hours
Now work out the maximum numbers of hours that you, and your team, are available to work. What is the expected level of income from that number of hours? If you plan on working less hours in a couple of years' time, start the first budget with the maximum hours you can work to build the business then in the next budget you can start to reduce your hours.
Step 5 - Calculate your profit
Your estimated profit is simply your budgeted income minus your budgeted expenses.
Step 6 - Work out your tax
Lastly, you’ll work out your tax obligations. The amount of tax that you’ll need to pay will depend on your specific situation, e.g. are you a sole trader with other forms of income or are you a company? You will use the estimated profit in Step 5 as a starting point for this calculation.
The hardest budget to prepare is always your first budget as it takes time to gather the information together. The next time you create a budget it will be much quicker as it will be a matter of reviewing the previous year’s budget to consider if the income and expenses need adjustment or if you want to reduce your hours or increasing your prices.
You can create your budget within a spreadsheet or a bookkeeping system. Set out below is a sample of what your budget would look like if you created it in Xero. This example is for a product-based business, if you run a service-based business you wouldn’t need to include COGS (cost of goods sold).
Ideally you want to have your budget ready for the start of a new financial or calendar year but if you’re fired up to start it now then do so. Usually a budget is completed for a 12 month period. It can be set in stone or updated and adapted to any change in circumstances as the 12 months progresses, e.g. a key member of your team going on maternity leave.
Your budget is a key planning tool for your business, not something you do once then put in the bottom drawer. It’s a document that you’ll refer back regularly as you do your financial review at the end of each month. When you have all of those figures in one place you can easily compare how your actual business numbers are tracking against your budget i.e. what is the variance in your figures?
By using your budget as part of a regular financial review it will inform the decisions you make during the year, e.g. is now the right time to invest in that extra piece of equipment, and allow you to make quick corrections, if necessary, e.g. the print ads aren’t getting the results you expected so change to a different platform.
If you’re ready to create your business budget, or review what you already have, and need support to get you there book a 20-minute call with me to discuss how I can provide that support for you. Book your call below.