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How to Create a Budget for your Business – and Why it Matters

Written by Grant Woolley . April 04, 2022
5 min read

As we enter the last quarter of the 2022 financial year, it’s a good time to start preparing your business for the next financial year and focus on what you want to achieve. An important but simple tool in this goal is a budget.

Contents

Why Should I Set Up A Budget?

A budget is an estimate of income and expenses within a given period of time. It is a benchmark set to ensure the efforts you are putting into your business are generating the returns you are expecting.

It can be as simple or as complex as your business needs and incorporate many different scenarios or goals. It can be a simple overall profit and loss for the year, or can be broken down into different business segments.

By setting up a budget you can focus your attention on what costs are being incurred by the business to keep it running and to ensure they are all reasonable. You may identify some cost savings or missing synergies just from the initial process of estimating your income and expenses for the year.

What Else Can A Budget Accomplish?

By experimenting with different scenarios in a budget, you can both plan for specific goals or Key Performance Indicators (KPIs) you would like to achieve or alternatively plan ahead for possible downturns.

For example, you could create one optimistic budget scenario where you want to increase gross revenue by say 20% over last year. In setting up the budget, you can ask yourself how you will accomplish this goal. More marketing? Invest in better Plant and Equipment? If you were going to invest in more capital, a budget with a cash flow element can then assist in deciding whether you will be able to manage the repayments.

Then on the other end of the spectrum there are the more pessimistic scenarios. After the hardships of the last few years it’s useful to know, what level of business activity ensures you are still generating enough of a return to be compensated for your efforts. If income did fall from global factors outside your control, what expenses would you be able to address first to keep in the black? Does a significant portion of your revenue rely on one client? How long would the business be able to survive if that contract ended and you needed to restructure? Spending some time stress-testing the business model on paper via a budget at the beginning of the year can help keep you prepared as the year unfolds.

Where Should I Start With A Budget?

The best starting point for estimating next year’s income and expenses is to look at the previous year. Exporting a month-by-month profit and loss as a starting point can help you identify your busy periods and note where your costs will increase and where you will need cash flow available. You can identify what your variable costs - those costs that move in line with your sales - and your other fixed costs and then update for the next year accordingly.

If this is your first year or you’re moving into a different market, then there will be some research and estimating to do upfront. But as the year progresses you can always update your budget as you understand more about the business process.

You will find many of the leading accounting software on the market allows you to create and import budget data within the software itself. This means you can easily generate reports that will compare your actuals to your budgeted figures at month end. Some examples below:

Xero: - https://central.xero.com/s/article/Create-a-budget

MYOB AccountRight: - https://help.myob.com/wiki/display/ar/Entering+budget+amounts

I Have My Budget – Now What?

As the old maxim goes, what isn’t measured isn’t managed. Whether it is a quarterly or monthly process, you should be setting aside time to compare your actual figures against your budget and asking the question - did my results line up with the budget and if not why?

What expenses were higher than anticipated? Is there a reason? Was there necessary repairs and maintenance costs that aren’t expected to be repeated? Or has a necessary part of your supply chain increased in cost much more than anticipated which means you need to consider alternatives or increase your prices?

Even If revenue was up it’s also important to ask the question why to see if you can maintain or maximise that area. Was a certain product or service more popular than anticipated? Or was it more macro-factors such as government policy or technology? Are you meeting the demands of the market or are you at capacity, and would now be a good time to start looking at expanding?

The important thing is that by putting the time aside each month or quarter to analyse the results and ask the simple question of WHY you can both prevent long-term problems arising early and identify strategic advantages.

Find out more about your business performance and how to create the best budget for your situation. Book in a conversation with our team at BLG Business Advisers to get started in the right direction.

*This information is correct at the time of publishing and is subject to change*
Written by Grant Woolley . April 04, 2022
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