Sage Advice UK

How to create a budget for your small business

Creating a budget is an important part of running a business

A budget is vital for any business. It allows you to track cash flow and business expenses, and determine how much revenue you will need to make to stay afloat or to make a profit. It will also enable you to track your finances on a monthly basis and see where you can cut costs and save money along the way.

A number of different budget templates are available online, however to get your budget started, there is a very simple structure you can use. An effective financial budget should include a month-to-month plan, so you will need to start with 12 columns, one for each month.

For each month, you’ll then need to record your sales forecast, all your business expenses and your estimated profits. This will give you a good indication of what your business can expect to be making on a monthly basis.

As well as putting together a monthly plan for your first calendar year, you should make a longer-term plan to cover a period of three to five years – even if this is just on an annual basis.

Here is more information on the three main parts of your budget, what should be included in them and how to record them.

Forecast sales

You need to have a sales section to note down all your expected income. If you are an experienced business, you will have previous data to use for your sales forecast. However, if you are just starting out, this will be a little trickier as you won’t have previous sales data, so you will need to carry out thorough market research to make a forecast of your sales.

There are several different sources that can give you a good idea of what your sales figures will look like. Looking into your competitors and finding out the industry standard is one way to help you set your sales expectations. You can also contact suppliers and manufacturers to give you figures of the products or services you are going to sell. All this information will help you calculate a reasonably accurate sales forecast.

Business expenses

The business expenses section of your budget will cover all the different types of costs your business is going to be paying out. To make sure you’re covering all your costs in your budget, make a list of them and keep revisiting it, adding to it when necessary.

Fixed costs

These remain the same on a monthly basis and include things such as insurance, loans, rent or mortgage expenses. Any costs that are regular (monthly or annually) should be included in this section. Looking at your bank statements will help you see what other costs you have that come under this category, as you may have numerous direct debits set up that need to be taken into consideration.

Semi-variable costs

These usually stay the same but may change over a longer period of time. Semi-variable costs could include your employees’ salaries or your marketing budget, as depending on the financial situation of your business, you may decide to give an employee a pay rise, or invest more in marketing to help the growth of your business.

Variable costs

These are the ones that will likely change sporadically. They will include the costs of the raw materials or products that you get from your manufacturer or supplier. If you are bookshop owner, for example, the cost of buying the books for your store will come under the variable costs section.

When you are working out averages for your costs, especially your variables, you need to be realistic and leave room for error. It’s better to overestimate your costs than underestimate them, as this will help you deal with any extra costs or higher bill rates that were not previously in your budget.

Life isn’t always predictable and things can and will come up, so setting aside a certain amount for miscellaneous charges is essential.

Profits

Once you’ve worked out your predicted sales and business expenses, they should give you a good idea of what kind of profit margin to expect.

When you start your business, any profit you make might have to be reinvested into the firm. And even if your budget predicts that you will be making a large profit, you may be considering using some of this to give an employee a pay rise, or to invest in expanding your business.

Essentially, having a budget with an estimated profit will enable you to make long-term goals and objectives for your business.

A company’s finances are what can ultimately make or break their business, so having a continuously updated budget is vital for the success of any organisation.