Table of Contents
- 1. Understand Your Budget’s Purpose
- 2. Use Historical Data
- 3. Use Estimates and Variables
- 4. Be Realistic With Your Budget
- 5. Consider Your Common Expenses
- 6. Consider Your Business Specific Expenses
- 7. Understand the Importance of Billing Cycles
- 8. Review and Revise
- Key Takeaways
- Frequently Asked Questions
All small businesses should track where their money comes and goes. Budgeting, often a painful and tedious exercise, is crucial to ensuring your business can make ends meet. We set out key points small businesses should consider when organising their finances.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
1. Understand Your Budget’s Purpose
A budget is an educated guess about your business’ expenditure for a certain period. As such, you will need to refine your budget as you develop a better understanding of your incomings and outgoings. The assumptions you make to prepare your budget will vary depending on the type of business you operate.
For example, a small retail business running for three years will be better positioned to forecast sales and expenses than a tech startup that has just launched. This is, in part, for two reasons:
- historical data can provide a foundation for estimating future revenue and expenses; and
- fewer variables mean a relatively simpler budget process.
2. Use Historical Data
Maintaining records of your revenue and expenses from previous years can be a great foundation for developing your budget. This data will provide insight into whether your business has been affected by factors such as:
- seasonal changes;
- holiday periods; or
- particular events.
Historical data also provides a snapshot of your expenses while operating your business during these times. Likewise, you can use this information to plan ahead for future seasons or holiday events. For example, should you expect wage expenditure to increase during summer as you deal with more customers? Do you need to ship more products to prepare for the Christmas holiday?
Continue reading this article below the form3. Use Estimates and Variables
Depending on how established your business is, you can create a budget with confidence using estimates and variables. For example, this might be the case if you have been:
- operating a retail business from the same location for several years;
- dealing with the same suppliers; and
- maintaining the same number of staff.
However, if you have just set up your business or are planning a big change, you need to work out your goals and create a detailed business plan. For example, do you intend to develop a new product, create a new website, or provide services in a niche industry? These factors will require you to predict the cost and time to develop the product or onboard your new clients. You then need to estimate your business revenue and the rate you predict to grow. This growth rate will affect costs such as rent and moving expenses if you outgrow your office and staffing numbers.
Additionally, you might have ready access to information on competitors in your industry. In that case, you can use the information on their growth and development as a guide for your own. However, you will need to review your business plan and respond as your business changes. Likewise, you should review your budget and update it in light of any changes.
4. Be Realistic With Your Budget
Small business budgeting is a tool. It helps you plan for the future and review how your business is performing. For this reason, it is best to be consistent with how you evaluate your performance.
After you have determined what your expenses will likely be and the revenue you expect to generate, you need to be realistic with your estimates. In particular, what margin of error will you allow if any of your variables change? For example, if you predict sales of $100,000 p/a what is the realistic best and worst case scenario?
Importantly, it is best to err on the side of caution and pick a more conservative figure than an optimistic one. Being pleasantly surprised by the performance of your business is better than being disappointed – it should also encourage you to keep your spending in check. Likewise, it is often easier to increase expenditure to service a higher demand than to scale back on expenses that often involve a contractual commitment.
5. Consider Your Common Expenses
The items you budget for will depend on the type of business that you operate. However, key expenses will apply to a large majority of small businesses, including:
- rent;
- utilities (power, water, gas);
- wages;
- superannuation;
- training and development;
- insurance;
- software/online services (Xero, MYOB, etc.);
- phone bills;
- internet; and
- vehicle expenses (repayments, insurance, registration, maintenance, etc.).
6. Consider Your Business Specific Expenses
In addition to these general overheads, several costs are specific to different business types. For example:
| Industry | Expenses |
| Manufacturing |
|
| Retail/eCommerce |
|
| Services |
|
7. Understand the Importance of Billing Cycles
Additionally, it is critical to remember that you will often pay different bills on different cycles (e.g. weekly, fortnightly, monthly, quarterly, or annually). Anything payable fortnightly, such as wages, will be due twice a month. However, there are some instances where three pay periods fall within the same month. Likewise, you should identify when this will occur for your business to plan ahead for these payments.
It is also important to understand your business is a long-term investment. Indeed, do not be overwhelmed by deviations in net profit on a micro basis. As long as you have identified the due dates and when they arise, you can plan for the short and long term.
8. Review and Revise
Your budget is a work in progress. No one can predict the future. Therefore, you should review and revise it often to better understand your business and (hopefully) more accurately forecast the money you can expect to receive and payout.
Scenario Planning is one method successful businesses use to manage the complexities of forecasting and mitigate the risks in cash flow management. Scenario Planning is a way to actively forecast your expected sales and revenue. You can then adjust your budget accordingly. Common forecasting methods include planning for a scenario with 20% fewer sales than expected, the base case with a median estimated revenue, and a scenario with 20% more than expected sales.
Key Takeaways
Budgeting for your small business is a critical skill to maximise your cash flow. Using historical data and estimates, you can calculate where your expenses need to go and how much you will need to have. You can also predict the growth of your business and how much profits you stand to make in a given period.
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Frequently Asked Questions
Key expenses that will apply to many small businesses include rent, utilities, phone bills, internet and vehicle expenses. You will also need to account for wages, including superannuation. Further, you might need to take out an insurance policy or provide training to staff.
Billing cycles are the frequency with which you need to pay certain bills (e.g. weekly, fortnightly, monthly, quarterly or annually). When running a small business, you will likely have numerous bills to pay, with their due dates falling at different times. You should identify when these dates will occur to plan ahead for payments.
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