Why do I need a budget?

 

BUDGET FACT SHEET

What is a budget?

  • A budget is a projected itemized listing of likely income and expenses for your business over a given period of time.

Why is a budget useful?

  • A budget serves as a guideline, or road map, that can help you to prioritize your spending and how you manage your money. Following your budget successfully can ensure your business is profitable and achieves its goals.
  • Creating a budget can help to decrease stress levels because there are no surprises. With a budget, you don’t have to panic or wonder if you have the money.  You already know.
  • Monitoring your budget against actual numbers will help you to identify wasteful expenses or lower than planned revenues.
  • Having a budget in place will likely make you more mindful. It will help you to ask the question “Does the business really need this?”

Where do I start to create a budget?

  • Set some financial goals for your business and then prioritize them.
  • Forecast your annual revenue.
  • Determine what your target net income is for your business.
  • Determine your expenses. Use a calculated or educated assumption to come up with a budget number for the year for each expense item in your business chart of accounts. A budget number for some line items may be easier to calculate than others.
  • Fixed expenses can be easily calculated on an annual basis.
  • Variable expenses can be calculated based on educated assumptions or past expense history.

How do I know if I am on track during the year as compared to my budget?

  • Once you have created an annual budget, you can break it down per month. Up to date bookkeeping records will allow you to compare actual revenue and expense numbers during the year through the end of any given month to your budget numbers through that given month. Analyze actual revenue and expenses versus budgeted revenue and expenses on a monthly or quarterly basis to see if your actual numbers are on target to your budget. Make adjustments as necessary such as to cut spending, or find ways to increase revenues.

How will my budget change or vary over time?

  • A business budget that is already in place should be modified if any of the key assumptions it is based on are no longer valid. It should also be changed from year to year based on new information such as updated business goals, rising or decreasing expenses or increased or decreased sales growth.

Budgeting tips for small businesses.

  • Overestimate expenses – Round up when estimating expenses. It’s much easier to account for underspending than overspending.
  • Keep an eye on small expenditures – small expenditures can add up very quickly and turn into a big expense. Pay attention to every bill that comes through to ensure that you are not spending frivolously.
  • Anticipate and plan for big expenses – If you know there will be a big expense coming up, plan accordingly and save for them along the way by adding a portion of the cost into your budget each quarter or each year and put the money aside into a separate account.
  • Pay the business first – List savings as a fixed item in your spending plan. You are less likely to spend money in the budget allocated to savings that is to help build cash reserves for the business.
  • Identify Essential and Non-Essential Expenses – Essential expenses are things such as taxes, payroll, rent, loan payments. These are things you must pay or you run the risk eventually of going out of business. Non-Essential expenses are things you don’t really need to operate such as certain supplies, office renovations, and free pizza Fridays. When money is tight, try not to splurge on non-essential items.
  • Shop around for Services / Suppliers – Shop around for new suppliers or other services performed for your business to save money.
  • Don’t forget seasonality – business could be great for many months during the year and slow for a couple of months due to the type of business. Know the seasons and high and low times for your particular business.
  • Revisit Goals – Revisit your business financial goals often, adjust when necessary and celebrate a little when you achieve them!

By Wendy Poirier, Owner of Meticulous Matters, Inc.