Which expenses go in your budget & how to calculate them
Do you have a budget for your business? It’s not unusual for new clients to come to me with no budget, or with an incomplete budget.
It’s one of those words that can be triggering for people, as they feel that its restrictive and they won’t be able to enjoy their business as they must stick to a budget that doesn’t allow for any enjoyable spending. That doesn’t need to be the case. A budget is powerful planning tool that allows you to make informed decisions about your spending.
If you don’t have a budget yet, then read this blog post - 6 steps to easily create your business budget – as it outlines each element of your budget.
In this article we’re going to dive deeper into the expenses you need to include in your budget and how to calculate them.
I recommend creating a budget for each month of the year, you can then add up the months to get your annual budget.
Regular payments
Start by including the regular expenses that you definitively know the cost of, e.g. rent.
Regular payments and price increases
Next, consider the regular expenses that will are likely to have a price increase during the year.
For example, you may know the monthly amounts for your Xero payments over the next 4 months but then it's likely they’ll be putting their prices up. That means you can add in the definite amounts for the first four months, then from month five onwards you’ll need to increase the amount in your budget by either a percentage, say 5%, or a fixed amount, say $10 per month, for the remaining eight months.
When the price increase is confirmed, you can update the estimated amounts in your budget with the actual figures.
Annual payments and price increases
You’ll do the same with annual payments, e.g. insurance. Review what you paid last year and the year before. Work out the price increase as a percentage, then apply that percentage increase to last year’s figure.
Once the price increase is confirmed you can update your budget.
You’ll include that increased figure in the month that you will pay it.
Wages – permanent employees
If you have a permanent employee, the amount you pay for wages will be the same every month.
Be aware that if you’re paying wages each week or fortnight there will be several months where there are additional pay periods due to the number of days in the month.
In your budget include the gross amount for the wage, not the net amount. Don’t forget to include the superannuation which will be a percentage of the gross wages.
Wages – casual staff
When you employ casual staff, e.g. more staff during the pre-Christmas months, you need to take this into account as the wage amount (and superannuation) will change each month.
Contractors
Contractors are treated in a similar way as casual staff in your budget, as you’ll need to work out when you’ll need them and for how many hours. You can then calculate their payments, including any likely increases in hourly rates.
Percentage of sales
Some expenses will be a percentage of your sales - add these expenses into your budget last.
For example, where you buy products to on-sell, the best way to work out the amounts to include in your budget is to see what percentage of sales those products have been over several past months, and months around the same time last year.
You can then use those percentages to give you an estimate for this year’s budget.
If your budget is showing a profit, you can then add any non-essential spending e.g. trips to business conferences, a new laptop or microphone, or a photo session for advertising.
You can create your budget in your bookkeeping software, like Xero, or in a spreadsheet. That spreadsheet can then be imported into Xero.
Budgets are easier to create than you think. You already have most of the numbers – it's simply a case of bringing them together and filling in any gaps.
Keen to understand your numbers better? Sign up to my fortnightly newsletter for practical tips and easy to understand accounting and tax information.