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How to budget for your business without complicating things 

What is a budget? Put simply, a budget is a tool for planning income and expenditure. Every business needs a budget to plan for resource allocation. A business should set a budget at least once a year but review this at least quarterly.

The No Budget story

Many years ago, when I worked in a large corporate organisation, I recall needing to fill out a ‘spending request form’ which would go to my line manager for approval. In those days, my pet expense item was attending conferences and training sessions as I was always thirsty for new knowledge and {secretly} it was an opportunity to take time off work and explore other possibilities.

The approval process was something like this: I would find an event advertised in the local media and assess how it would be beneficial to my role. (most of them usually were). I would approach my line manager and pitch the idea of attending the course or conference. If she was convinced of the benefits, I would be asked to fill a form to formally request for funding. She would countersign the form and send to a more senior manager for approval. The senior manager would then contact the management accountant who would check if there was a budget allocation available. The training and development budget was a pooled budget so when it was finished, that was it. If there was a budget, the management accountant would endorse the piece of paper and that would mean that the event had been approved in principle.

However, there are many times when the document came back with a ‘NO BUDGET’ Stamp on it! That was always disappointing for me, not least because of the missed opportunities for gaining new knowledge. For the business however, the ‘NO BUDGET’ Stamp was an important control mechanism to ensure that there was no overrun of costs.

Why do you need a budget?

A budget is an important tool for managing the costs of a business. A budget is a plan that outlines the expected income and expected expenditure for a business. Having a budget helps ensure that you will always have enough money for the things you need and the things that are important for taking your business forward. Following a budget will ensure you keep focused on the ‘Key things’ and avoid impulse buying or chasing the next new shiny object available. It also ensures that you don’t spend money on the wrong things and end up having cashflow problems. It will ensure you don’t spend money that you don’t have and end up getting into debt or falling foul like missing supplier payments or not paying your tax on time. Having a budget will also help you get out of debt by carefully managing payment. It can help you control your spending and set money aside to pay employees, back what you owe. Having a budget also helps you prepare for emergencies or save for retirement by consistently putting money aside over a period of time.

A budget is an important control mechanism where every spending request can be assessed against. Using a budget will help highlight unnecessary spending habits.

It also helps to ensure that all necessary expenditure e.g. cost of sales and overheads have been planned for to reduce omissions.

What does a budget look like?

A budget has got two aspects – money in and money out. Money in is the income excepted and money out is the expenditure.

Money in – define the income streams – where will the money come from and when is it expected. List out all the sources of income and any special conditions connected to them. List any assumptions and any reliance on other parties.

Money out – This is the expenditure – what does the business need to put in place for the income to flow in the manner expected above? List any assumptions made. The key items to budget for as expenditure will depend on the type of business but will typically revolve around direct costs of sales, people resources, assets and equipment, premises and professional services.

Identify who will be responsible for the budget. Each budget must have an owner. For a small business this will usually the director or owner. To own a budget means having the authority to spend and being responsible for and being held accountable for managing the budget.

How To build a budget

Where do you start in building a budget? For a new business, tool with information contained in your business plan. For an existing business, start with your last set of management accounts as a starting point.

When you have your, income and expenditure, the easiest start for building a budget is to use a spreadsheet. The income and expenditure will be down to the left on the rows and the months will be across at the top as columns. Fill out the information for every row and column and make note of any assumptions at the end of each row or on a separate tab. A budget makes up the profit and loss statement and from the spreadsheet you can easily add formulae to calculate the expected profit or loss is for each month.

There is also specialised software for creating a budget for your business. QuickBooks Online and Xero have inbuilt sections for preparing a budget for your business. Both QuickBooks Online and Xero will have guidance on how this works.

Once you have you budget, review to make sure it is realistic and assess if it will help achieve your goals.

Conclusion

In summary, a business should set a budget at least once a year, or when starting a new venture of project. Plan for both income and expenditure. Expenditure should occur in line with an existing budget. Budgets should be reviewed on a quarterly basis and any variances with actual performance addressed.

Over to you

Have you got a budget for your business? Are your spending decisions aligned with the items in your budget? How about the income streams? Are you on track? What are the biggest challenged you face with budgeting?

Let us know in the comments below.

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