Budgeting might seem like a bore, especially for time-poor tradies and small business owners, it is crucial in ensuring long-term success. Here are five key steps to getting started with a simple budget for your business.
1. Getting started.
Janine Allis, founder of Boost Juice, identifies smarter money management as the key to growing a successful business, encouraging small business owners to be vigilant about their expense records.
The simplest place to start is by going back over your monthly sales and expenses.
Looking through your monthly sales and expenses will help work out which are your strongest and weakest months and when you have the highest costs. Break down the following:
- Your labour costs (Employed staff and outsourced labour)
- Office expenses (This might include equipment like computers)
- Other recurring costs (Utilities, rent etc.)
The next step is to subtract these expenses from your revenue. Consider how this figure compares to your financial goals – are you on track or will you need to think about cutting back expenses?
If you’re just starting up, you’ll be forced to make estimates, but speak to your financial adviser and do some research on comparable businesses to determine typical costs and revenues. Don’t just guess!
2. Know your income sources.
It’s important to know where your money is coming from. Organise this by breaking down your income into two main streams, recurring income and one-offs (like a government grant). If you’ve taken out a business loan, be sure to also add the repayments to your expenses list in step 3.
The following is a simple example:
|Income||Monthly Total||Annual Total|
|Recurring for 2017|
|One-off payments for 2017|
This step focuses on separating fixed costs, such as insurance and rent, from variable costs like office supplies, employee costs and marketing expenditure.3. Determine variable and fixed costs.
Write down all of these expenses and create a monthly and annual cost table, as shown below:
|Expenses total for 2017||$207,400|
4. Review and determine profit.
The fourth step is to determine how much profit you expect to make during the financial year. Jessica May, founder and CEO of Enabled Employment, says projecting these numbers is key. “We project 5-6 months ahead,” she says, “we use spreadsheets that automatically calculate the amount we expect to have coming in vs what is projected to be going out, and we work with a contractor CFO to help us out.”
For small business owners who are managing their own expenses, simply deduct the total annual cost of expenses from your annual income total.
In the example given, total income of $283,400 exceeds total expenses of $207,400, leaving a healthy annual profit of $76,000.
The whole premise of budgeting is to help ensure that your income consistently outperforms your expenses. Having a budget will help you improve this by identifying the biggest costs and revenues. It is generally recommended to build in a safety margin of between 10 and 20 per cent around revenues, to account for unpredictable events.
The final step is to update the budget on a monthly basis as things change – and as any small business owner knows, that is very likely.
Creating a budget for your small business is essential to determine where your money is going, and to achieve your financial goals. And if you need extra funds for expansion, talk to Prospa about a business loan just right for your needs.