Budgeting for Business
Written by: Canny Accounting
Operating a successful business – whether it be large or small – is very much about managing cash flow, and this is where budgeting comes in. Adhering to the maxim:
failing to plan is planning to fail
A realistic budget is a form of risk management that looks at contingencies such as a change in market conditions or, unfortunately even natural disasters.
A strong budget will identify available capital, estimate expenditure, and conservatively estimate income and cash flow. The simplicity of a business’s budget will be affected by its size – any business that employs staff will require a large part of the budget to accommodate workers’ ongoing wages and entitlements.
Budgeting Components + The Financial Information You Need
- Income
Looking at the money that comes into your business over the period of one year can give you an idea of monthly income, and will show some trends. For example, many businesses will have less revenue coming in over the Christmas and New Year break periods. Understanding this can help manage your cash flow throughout the year.
- Expenses
These can be either fixed or variable. Many expenses are fixed as they occur regularly – the most common of these for many businesses is payroll and superannuation, insurance, loan payments and rent. Fixed expenses are often substantial, but it is also important to consider the smaller ones that may occur weekly, such as petty cash or newspaper subscriptions, which add up over the course of the year.
Variable costs and expenses can include the cost of goods sold, equipment purchase or replacement, marketing and advertising and client entertainment expenses. During times when business revenue is lower than expected for any reason, built-in budget flexibility can focus on options around your variable expenses.
Fixed expenses should never be considered ‘flexible’. A budget must consider the fact that these expenses must be paid on time regardless of the financial state of the business. Not doing so may incur substantial legal penalties, particularly regarding workers’ wages and other entitlements (i.e., superannuation, leave pays etc.)
Another set of expenses that should be included in your business budget is taxes. Regular GST payments, payroll tax, and income tax (both in bulk and via instalments) all need to be factored into calculations to give an accurate picture of your budget.
While fixed assets are going to be around for the long term for most businesses, they are not ‘fixed’ in the sense of remaining unchanged. Investments in fixed assets should be part of the budgeting process.
Legislative changes can affect wage and superannuation, and the real estate market may cause increases in rental and lease expenses. This is where a well-developed budget can assist you in making decisions and allow for contingencies such as these.
- Contingencies
Whilst risk management and mitigation is a separate topic, it is based on strategic thinking and good business sense. Preparing for unexpected situations is strategic thinking that will inspire budget flexibility in the form of a dedicated contingency fund.
Large businesses will often have a detailed risk management system in place, but this is not always feasible for smaller businesses. An analysis of key customers, suppliers, equipment and personnel is a good start to determining what should be set aside for contingency purposes. Getting the balance right is important! Obviously, under-estimating is not a good idea, but over-estimating can lead to unused capital being tied up.
- Profit + Loss Statement -VS- Cashflow
A current profit and loss statement is a key component of any budget and will assist in determining monthly revenue and income trends, but it is vital that business owners and managers understand that there is a difference between your profit and loss and your cash flow. A profit and loss measures income and expenses but does not account for asset purchases, taxes and loan funding.
Why Budgeting Is Important For Business…
Ways in Which Budget Can Help A Business Grow + Succeed
- Budgets are often linked to a business or strategic plan, which helps to keep a focus on goals and drive continuous improvement. Your budget can help you develop Key Performance Indicators (KPIs) for your business, and track them during the year;
- A budget can increase staff engagement by including money for training and professional development. This will assist staff in remaining appropriately skilled, increase productivity, and reduce risk;
- A budget is forward-thinking and anticipated financial and industry trends, increasing your overall knowledge about your business and its finances; and
- For larger businesses, budget planning and forecasting can provide cohesiveness and cooperation between different sections or departments whose staff might not otherwise interact.
Accounting Systems For Budgeting Software + Programs
There are many options available to businesses of all sizes for budgeting. A basic spreadsheet in Excel may be enough to help you plan, and most online accounting software will provide at least the basic budgeting ability and is worth investigating.
There are also far more advanced tools, which can use a “baseline” budget and then expand into scenario modelling and comparisons. Many businesses may not think they need “3-way budgets” (Profit and Loss and Cashflow and Balance Sheet), however, this ability combined with scenarios can really boost your understanding of the options you have, support decision making, and can provide useful data to your bank or finance partner.
Cloud-based software is rapidly staking a claim as the way of the future, and cloud-based budgeting software can assist businesses with more efficient information access, improved reporting and longer-term cost savings.
We can assist you to identify a tool or set of tools that suits your business needs.
Budgeting for Business FAQs
Is A Budget A Fixed or Flexible Document?
While it should be as accurate and up-to-date as possible, financial forecasting is not an exact science. The contingency component is one way of building flexibility into a budget.
How Regularly Should Budgets Be Updated?
Ideally, budgets will be updated at least at the beginning of a new financial year. A budget review can also be an opportunity to engage with staff and gather information for training and professional development. If your business has dynamic, changing needs and opportunities, using scenarios is an effective way of not losing sight of your original budget, but building in changes to your business environment during a “budget period”.
What Are Some Pitfalls of Not Budgeting?
Overspending is one of the most obvious, but also spending on things that may not be particularly effective. The planning component of budgeting involves analysis, which helps to focus attention on what is effective and reliable. One example of this is a staff training budget – training and professional development should focus on updating core skills which will produce tangible results.
Do I Need To Pay A Professional To Create My Budget?
This will depend on the skills of the people in the business as well as the size and complexity of the business. An Excel spreadsheet can be put together with a bit of time and research into your business finances.
Can Canny Group Help Me With My Business Budget?
Yes! We love working with our clients on their budgets, ensuring their knowledge of their own business finances helps them to make better decisions each day. Our process ensures that the budget we deliver is done in conjunction with you and tailored to your business and personal needs.
Canny Group, The Accountants Geelong Trust For Your Business + Your Business Budget
Canny Group have been assisting the community, near and far for over 60 years with showing shrewdness and good judgement, especially in money or business matters.
Our commitment to our clients is to give them the confidence in knowing the team working with them is doing what we do best so that you can focus on doing what you do best. When it comes to your business and giving it the best opportunities to succeed, a budget should be on top of the list!
Get in touch with our team to find out how we can help you with your business and your budget.
