A budget is an important tool to help you understand your business’s financial position now and document your financial projections for the future. A budget can help your business meet its financial goals. It’ll make sure you’re not spending too much money and show you if there’s extra money coming into the business that could be used for business growth activities.
There are a number of things you’ll need to know to put a budget in place:
Choose a time frame for your budget. Whether you choose monthly, quarterly or yearly budgeting will depend on the needs of your business.
Enter all your fixed expenses like your salary, rent, insurance, and any other known costs.
Tip: When starting out and deciding on your salary, find a balance. Don’t be greedy but pay yourself what you’re worth. A good tip is to consider what you would pay someone else to manage your business and pay yourself that amount.
Enter all your variable expenses like utilities, costs of material, staff wages and tax. If in doubt, estimate the maximum amount you expect to spend on these expenses over the budget period.
Tip: If you can, turn your variable costs into fixed costs, it may end up saving you money and will become an expense that you know to expect. For example, paying a bookkeeper hourly may be more expensive than buying a pre-paid monthly service.
Enter your expected business income over the budget period. Once your business has been up and running for a while you’ll be able to review past periods to give you a good idea of what income to expect.
Tip: Be conservative when predicting your income—give yourself some wriggle room in case things change.
Record the actual income and expenses over the budget period and calculate the difference between your budgeted amount and actual income and expenses.
Throughout the budget period make sure you keep an eye on how you’re tracking against your budget. If you’re spending more than you’ve budgeted for, look for ways to cut costs and avoid spending money on anything that isn’t essential to the day-to-day running of the business. If you’re making more money than you expected, look at ways to use the extra funds to reduce debt, create a financial safety net or grow your business.
Tip: Analysing your budget will help you to recognise seasonal patterns and determine whether decisions like changing prices or adding a new product or service, was the right one.
If you need assistance in analyzing and preparing your budget, its best to seek the expertise advice from your trusted Melbourne Accountant today.