With the end of the financial year fast approaching, now is a great time to think and plan for the upcoming 12 months. Creating a budget for your small business will help set you on the path to success and ease any uncertainty.
The benefits of having a business budget include transparency, making better business decisions, an improved understanding of costs, and helping with determining the direction of your business. But on the other hand, having no budget could cause financial issues and undue stress down the track.
Below are 5 benefits of having a budget for your small business.
1. Clarity of expenses and resource allocation
A budget outlines all the expenses related to running your business. Sitting down and reviewing your expenses on an annual basis (at a minimum) helps to:
Eliminate costs of things you don’t need or use.
We all have those subscriptions or memberships we sign up for, thinking they will benefit us. But then, a few months down the track, do we still use them? So now is an excellent time to consider if you have gotten the value from then that you thought. If not, cancel the subscription.
A good idea is to set up a reminder system for all contracts with end dates and when they renew (watch out for those that automatically renew). Put a reminder 1 month before expiry to check if the expense is still a must-have. Reviewing the expense before expiry also gives you time to check how competitive the price is. Use your calendar, Trello, or excel in monitoring due dates.
Seek out quotes and negotiate
For those more costly or repetitive expenses, check that they are competitive. Go and seek alternate quotes. Or perhaps you can bundle a few things together or sign up for a more extended period (if you know you will use it) for a discount.
If you have been with a supplier for a while, can you negotiate a lower price or ask for a discount if you pay early? Sometimes suppliers will offer a few % off if you pay their account earlier than their standard terms.
Plan for new expenses
Include any new expenses for the upcoming year. For example, perhaps you want to hire a new employee or outsource a function of your business. Include these expenses to see how they impact your overall budget.
And don’t forget to include a wage for yourself and the super to go with it. Even in the early stages of business, I recommend including a small wage for yourself and the super to go along with it. Currently, the super guarantee is 10% and is set to rise to 10.5% on 01 July 2022. After that, you can incrementally increase it every few months until you get to the wage and super contribution you want.
2. Assists in setting revenue goals
At a minimum, you need to cover your business costs. Understanding your total expenses provides the starting point for how much income you need to bring in to cover these.
You can then look at setting goals for how much revenue you want to be making each month, quarter and year. But be careful; you don’t want to be too optimistic as this may give you an unrealistic expectation.
So instead, I recommend you use more conservative revenue estimates in your budget. Then create a second set of more ambitious sales targets to motivate you or your staff.
If you meet the conservative target, the cash flow won’t suffer. And if you exceed your base target, that’s the cream, and you just need to put aside more for tax and give yourself a pat on the back or perhaps a bonus to celebrate.
3. Manage cash flow more effectively
If you know when you expect income to come in and when expenses will need to be paid, you will be able to manage your cash flow more easily. In addition, it helps you to plan and make sure you have cash available to meet the expense.
Let’s say you have a significant expense twice a year, e.g. packaging costs; then you know you need to have the funds available to pay the invoice. So you can look to increase revenue in the lead-up and start allocating cash in a separate account to pay for these expenses.
4. Planning for tax becomes easier
Setting the budget at the beginning of the year will show you an estimate of your profit in 12-month’s time. You can then estimate your potential tax bill and start planning early to save this money in a separate bank account. You will then save yourself from future tax surprises and the angst of scrambling for funds when the tax is due.
5. Helps to attract investors or raise debt
If you are considering an investor, they will likely want to know how profitable the business is. Part of their due diligence will be to assess the costs and revenue of the business. Having a budget also shows them that you understand the business and what makes good business management.
Seeking lines of credit such as a bank loan will often require a budget. The lender, like an investor, will want to know if the business can repay the loan. Be sure that loan costs, e.g. application fees and ongoing lending fees and interest costs, are included in the budget and impact the business’s profitability.
You can also use the budget to stress test your ability to pay more interest should the rate increase.
You have a budget, but what now?
Once you have put together a business budget, it’s not just set and forget. You should monitor the budget against your actual revenue and expenses monthly or quarterly.
Monitoring the budget will help identify if you need to make more sales or if expenses have been getting out of control, and you can respond accordingly.
If you have accounting software, like Xero, you can upload the budget and then use their reports to monitor the performance.
In addition to preparing a small business budget, I recommend creating a corresponding cash flow forecast (money in, money out). That will give you greater transparency and understanding of your business.
I’ll tell you more about cash flow forecasting in my next blog post (sign up for my newsletter if you want to know when it’s been posted).
Sometimes it’s easier just to keep doing the same thing hoping that all will be ok or because you don’t want to know the numbers, or they may scare you. However, imagine if you can start to understand your numbers. Then, your path forward will become clearer and help you make better and more informed decisions. Not to mention it will help reduce a lot of the stress and angst that surrounds money fears and decisions.
If you’ve been putting off drafting a budget because you don’t know where to start or don’t have time, reach out to me today. We can discuss your options and help get your business on track for the upcoming financial year.
And, if you haven’t already done so, pop on over to my Facebook group, When business and purpose collide. Join other socially aware business owners on their journey to a purpose-led business.