How to use your budget to make better business decisions

What do you do with your budget once its completed? I find that many business owners are unsure how to use their budget throughout the year, so they put it in the bottom (digital) drawer and don’t look at it for a year.

Budgets can be a highly effective tool to assist you in making better business decisions. My recommendations on how to use your budget throughout the year are:

1. Do end of month comparisons

At the end of the month compare your budgeted figures against your actual figures.

You can get both sets of figures from your bookkeeping software.

Look at both your income and expenses. Are you on track for what you'd budgeted for the year?

If your income isn’t divided evenly across 12 months, e.g. you have a seasonal business or you take time off during school holidays, be sure to divide your annual budgeted income by a smaller number of months (rather than the standard 12 months). This will give you a much more accurate figure that you want to achieve for your income earning months.

In the same way, be sure to take account of any peaks in your expenses, e.g. you make an annual insurance payment in the first month of the year, so you can make a more accurate comparison.

2. Consider how you’re tracking for the entire year

As you move past the first month of your financial year, you can also compare how you're tracking for the entire year.

Is your income more or less than you were expecting?

If it is more, do you need to put money aside for one-off purchases later in the year? Depending on your business model you may need to have spare cash to balance out any months that will have lower income, or where you know you’ll have higher expenses in coming months.

If your income is less than expected, do you know why? Does your budget need to be adjusted down across the year because something has changed?

Do the same comparison with your expenses. If they were more or less than budgeted, do you know why? Do you need to adjust your budgeted expenses for the rest of the year?

3. Use your budget to make decisions on purchasing discretionary items

When you have an up-to-date budget, that you know reflects the reality of what’s happening in your business, it will help you to make good decisions about buying discretionary items.

For example, do you have enough profit to cover going to that business conference?

Or do you have enough income to put aside money each month to save up for a replacement for your aging laptop or could you buy that new laptop now, knowing that you’ll have enough to meet the financing payments over the next 12 months?

4. Look to your budget for covering unexpected expenses

With an updated and accurate budget, you'll have a clear picture of what money you have available if you need to cover unexpected expenses, e.g. negotiating terms with a creditor, or having to pay an insurance excess on a flooding event.

5. Keep yourself motivated!

When you’re regularly checking in on your progress against an income goal, the results can keep you motivated in your day-to-day work.

Knowing that you can put aside money each month for that business conference later in the year (maybe even grab an early bird ticket or upgrade to the VIP option) can be a great motivator when it comes to continuing to market your products and services.

A budget is a living document. It can be used throughout the year to give you confidence in your decision making.

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