Basic cost and revenue calculations help keep an operation on track and make planning easier.
Why a business budget should be top of your new year resolutions
New Year is a great time for business owners. In the post-festive season glow, everyone comes back to work with energy and the desire to make a difference in the coming year. One of the best things you can do to harness that energy is build a business budget.
Why a business budget?
A budget is a tool that allows you to keep track of your resources and to plan to meet your financial obligations and challenges. A good budget will ensure that your business stays on track all year long and though you may need to revisit it occasionally to make changes, the effort of building a budget is never wasted.
The essential steps
If you have an accountant, it’s a good idea to work on your budget with them but the basic steps of building a budget can be carried out by anyone.
Look at your revenue. Take the data you already have and look at your income: Where does it come from? When does it come in? Identify your most valuable clients and when you might need to prepare for a seasonal slowdown.
It’s important to focus on revenue rather than profit at this stage, as we’re not looking at expenses, just yet.
Calculate your fixed costs. Fixed costs are the costs that come up regularly and which are essential to running your business. This can be anything from insurance to rent payments. Write them down and then total them. You can then subtract this from your revenue.
Calculate your variable costs. Costs such as utilities are essential for your business, but they’re not “fixed”, they vary month by month. You can also include any expenses you have that are non-essential for the operation of your business. Think of the office coffee machine, that sort of thing.
Create your P&L (profit and loss). This is the least fun bit and it’s often easiest to work with an accountant on this, but you can do it yourself and it is absolutely essential to the operation of a successful business.
It’s simple addition and subtraction: add up the revenue coming in for a month, subtract the expenses and what’s left is either profit or loss.
Some months, particularly in seasonal businesses, are going to be better than others. However, you do need to be able to cover your loss-making months by your profitable months.
Use the data to plan your business’s future. When you have all the financial data that you need at hand, you can start to use it to make some informed plans about the future of your company. The more data you have, the better the guide to the future, the easier it is to plan. Which is why you should carry out this exercise annually as the New Year begins.
Business budgeting is an essential component of managing the finances of any company. The good news is that it’s not as hard as you might think to create a budget and once you have one, you’ll wonder how you ever managed without it.
Sonia Gibson is founder of Accounting Heart.