How To Budget For Your Business With Confidence
We all know how important it is to have a sound budget for a business, whether it is a start-up or an established organisation. However, from our vast experience, we have found that business owners avoid having to manage their budgets because they don’t really understand where to begin, or even what a budget should cover.
Budgets are extremely important as they help ensure there is a regular flow of cash coming into the business and enable all bills to be paid in a timely fashion.
Basic Budget Terms
A budget can be broken down by the following terms.
Your expenses are essentially what it costs to run your business. This includes things like rent, salaries, office goods, power, IT and so on. Many of these will be fixed costs, the same payment every month, while others such as electricity and stationery will vary according to your level of usage or requirements.
The income of the business refers to any money that is made from the sale of goods and services. There may be some periods in the year when income is high such as before Christmas, and then times when business slows down, such as January or July, the start of the New Year or the financial New Year. Of course, this is dependent on what goods or services you offer.
Profit and Loss
When you deduct the cost of the expenses from the income your company makes, your aim is to come out with a positive figure. That means you are making a profit. If your income is less than your expenses, then you have made a loss for that particular month or quarter. A business can only operate on a loss for a limited period, depending on the savings you have in the bank, before it needs to close down.
Your income and expenses figures are recorded in your profit and loss statement so you can see what is happening at a glance.
Assets and Liabilities
Your assets are things owned by the business, such as the building, equipment and vehicles. Your liabilities are money that you owe from your loans and taxes. If your assets outweigh your liabilities, you are certainly heading in the right direction and are seemingly in a good financial position.
The assets and liabilities are recorded in your balance sheet which demonstrates your overall net worth.
When you understand what these standard budgeting terms mean and what information they provide, it’s a lot easier to understand your financial position and how to prepare a budget.
Managing Your Budget
When you document your figures in this way, ensuring they are accurate, you will have a clear picture of where your money is coming from and where it is going. It makes it easier to pinpoint money leaks and eliminate them. It can also help you focus more on what brings in the most income.
A clear budget allows you to track the timing of your incomings and outgoings, so your business has enough cash in the bank to cover your bills if they don’t coincide with your incomings. Because of your budgeting system, you’ll never be caught unprepared and wonder why your account is so empty.
Preparing a budget isn’t hard, but it does need to be accurate and detailed if it’s going to help you meet your current obligations and plan for the future. Remember this, though, your budget is not set in stone. It’s a document that will change over time depending on how much you bring in, the level of your expenses, your outstanding loans and any assets you purchase or sell. It’s not a case of doing the budget once and forgetting about it.
Your budget is the rock on which you build your business so make sure you give it the attention it deserves. If you’re concerned about preparing your budget, talk to the team at The Accounts Studio. We’ll help you prepare and understand your budget so you can proceed confidently in your business.