How to create a budget in Xero
Knowing your numbers is an essential part of running your business. One of the best places to start is to create a budget, so you know what your estimated income and expenses will be.
You can create a budget in your bookkeeping program (or a spreadsheet).
In this article I’ve set out the steps to create a budget within Xero. Note that the numbers you use should all be exclusive of GST.
Step 1: click on Accounting in the top menu, then choose Reports from the drop-down menu.
Step 2: you’ll be taken to a new page. Scroll down to Financial Performance, then click on Budget Manager.
Step 3: you’ll now see a blank template for your budget.
At the top of the page, change Select Budget to Overall Budget, change Start to July 2024 (if you’re doing a budget for the financial year), leave Actuals on None and change Period to 12 months.
Then click the Update button.
You can now start to fill in your income and expenses.
BEWARE!! The budget does not automatically save what you add, so be sure to click on the Save button at the bottom of the page regularly. I suggest you do this after you’ve completed each line to ensure you don’t lose any information.
Each time you click on the Save button, you’ll see a notice appear at the top of the page acknowledging your changes have been saved.
Step 4: When you type a number into the boxes that are highlighted in light blue, you’ll see a green arrow appear by the box.
By clicking on that arrow a box will pop up that gives you some useful options.
‘Apply fixed amounts to each month’ will copy the number you typed into all of the other boxes in that row.
‘Adjust by amount each month’ will increase the first number you typed in by a certain amount each month. For example, if you chose $5000 as your starting figure, and $200 as the adjustment amount, your boxes would be $5,000, $5,200, $5,400 etc.
‘Adjust by percentage each month’ will increase each month by a set percentage. For example, if you chose $5,000 as your starting figure, and 5% as the adjustment percentage, your boxes would be $5,000, $5,250, $5,512.50 etc
Remember to click on the Apply button after you’ve made your selection.
Bonus step: Xero allows you to easily compare your budgeted amounts for each month, to what actually happened in your business, referred to as a ‘variance’. This information is useful as you can use it to see if you’re on track with your income goals, as well as your expense levels.
To run that report, follow step 1 above, then in step 2 click on Budget Variance (rather than Budget Manager).
On the next page you see, change the Date Range and choose Overall Budget. An example of a Budget Variance report is shown in the image below.
Your budget is a living document, it’s not something you do at the start of the year then hide in the bottom drawer. I recommend that you review your budget at the end of each month (using the Budget Variance report) and update your income and expenses as necessary.
Creating a budget can initially feel overwhelming with all of the numbers you need to add, yet it is one of the key documents for your business and a great way to get more familiar with your numbers.
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