One side of owning a business that rarely gets mentioned is budgeting.
Although it may not be the most glamorous activity, creating a business budget for your company can bring several important benefits. Indeed, having a budget allows companies to remain efficient with the way they allocate resources and spend funds. More precisely, business owners can keep tabs on their expenses in order to avoid spending more money than they are generating.
On the other hand, if a business has achieved profitability, the budget will highlight this fact and help organisations use their positive balance to take advantage of opportunities for growth or stash some of the proceeds in an emergency fund.
Don’t Overlook Creating A Budget
Despite its proven benefits, some small business owners feel far too intimidated to even start the process of creating a budget for their companies and instead operate without having one. This could work for a while if the operation is experiencing natural growth and money is flowing in. However, when things stagnate, or business is slow, the owner’s risk taking on too much debt to stay afloat. In these cases, it may for the best to turn to a professional accountant service and let the experts handle the budgeting process.
Nowadays, even small businesses can easily gain access to the highest level of accounting expertise by turning to specialised firms. Keep in mind that you may wish to look for accountants that operate in your area, such as Accountants East London, as they would be familiar with any local law or tax requirements. The professional accountants will ensure that the business remains tax compliant, that it takes advantage of tax-deductible expenses, that all of its records are accurately represented and kept, and much more.
Where To Start?
While at first glance, starting a budget may seem like a daunting task, when the process is broken down and tackled one stage at a time, things become much more manageable. The first step is to examine the past performance of the business and take note of all revenue sources. The goal is to create an accurate picture of the money that is coming into the company on a monthly basis.
Make sure that you are tracking the revenue (all generated proceeds before expenses are deducted) and not the profit (the positive amount of money left after all expenses are accounted for). It is strongly recommended to do this for at least the past 12 months. If the business is brand new, you can do some research about the average industry costs in order to create working estimates about your own company.
Fixed Costs And Variable Expenses
The next step of the budgeting process is to identify the expenses of the business. Typically, they are divided into two groups. Fixed costs are any costs that must be paid, no matter if the business is operating at a loss or is profitable. These include rent, debt repayments, payroll, taxes, any applicable insurances, potential depreciation of assets, etc.
The other group is the variable expenses. They are characterised by the fact that their amount changes depending on the quantity of the produced goods or services. This category may consist of raw material purchases, commissions, shipping costs, utilities, marketing costs, etc. As part of the natural business operations, companies may also incur one-time costs that rarely come at convenient times. Budget for such unexpected occurrences by setting aside some money in a dedicated emergency fund.
Compile The Data
With all of the information at hand, the step is to create a Profit and Loss (P&L) statement for each month. Just take the generated revenue for the period and subtract all of the expenses from it. If you get a positive number, then your business has been profitable for that month. Don’t get discouraged if you have reported a loss for some months, as this is normal for even big organisations.
Now that you have a good idea of the past performance of your business, it is time to create a forward-looking document, e.g., your budget. Analyse the available data and look for seasonal patterns, investments that have exceeded your expectations, or any inefficient spending of resources. Based on the information, you can create a projection about the future performance of the company, typically, budgets cover a period of 12 months.
Keep in mind that these are still estimates, and nothing is set in stone. That is why it may be wise to factor in some slack in the numbers of the budget. Alternatively, you may start implementing cost-cutting initiatives to boost revenues during periods of adverse circumstances or seasonal slowdowns.