Creating a Small Business Budget

Posted 8 Oct '21

Creating a Small Business Budget

Small business budgets are empowering. They give you the knowledge and insight to eliminate wasteful spending and get to profitability faster.

When setting a business budget, you need good numbers. Don’t guess at what’s coming in and what’s going out. You could be making assumptions that just aren’t true. Take the time to look into your accounts and dig out the real figures. It might sound like hard work but it’s worth it.

Budgeting has a lot of baggage. It sounds boring, complicated and even daunting. But there’s no need to put it off. Setting a budget is part of becoming financially literate, and it’s a vital skill. The better you can 'read' the figures relating to your business, the more successful you’ll be. 

So which figures are important for your small business budget?

1. Profit and Loss report

This report tells you at a glance whether you're making money or losing it. To do that, you’ll subtract your expenses from your income. 

Income (revenue): How much money are you generating from sales of your products or services? It helps to break these into:

• Recurring income: regular and reliable revenue from client retainers and contract work
• Expected income: predictions of future income. This is a forecast of what your business is likely to earn.

Expenses (costs): How much money are you spending on business costs such as staff, raw materials and marketing? As with income, it helps to break these into:

• Recurring expenditure: your monthly payments for rent, utilities, payroll and so on
• Sundry costs: occasional payments for office supplies, client entertainment expenses and other items

It can be easy to overlook some of the costs of doing business. To help capture them all, consider things like:

• Depreciation of business assets
• Overheads such as rent or energy
• Payroll - the total cost of employing your staff, including insurance, taxes and benefits.
• Debt repayments

If you have more revenue coming in than costs going out, you're making a profit. If it's the other way around, you're making a loss.

If you make a profit, think carefully about what to do with it. Could you:

• drive bigger profits by reinvesting in the business?
• save money by paying down debts quicker?
• keep cash in reserve to ride out future revenue dips (this is an especially big consideration for seasonal businesses)?

There are many ways to treat a profit and setting a business budget will help you decide on the right strategy.

2. Balance Sheet

This tells you what your business is worth. It's the difference between what you own and what you owe. On the plus side of the balance sheet you’ll find:

• the value of the assets owned by your business, such as work tools or real estate
• cash you have in the bank
• invoices that have been sent to clients but have not yet been paid

All of these are business assets. On the other side of the balance sheet are your liabilities, which include:

• expenses that have been incurred but not yet paid, such as bills from suppliers
• taxes that are due to be paid in the near future
• loans or other business debts that you have

The balance sheet shows your assets minus your liabilities.

3. Trial Balance

A trial balance is another very useful accounting concept. It shows all your debits, credits, assets and liabilities on a single document. In other words, it represents the entire balance of your business accounts.

With all this information at your fingertips, you're ready to start setting a budget. It will tell you how much you:

• spend running the business
• can invest to improve the business
• can pay yourself (and any shareholders)

A budget will also give you a much better idea of what your cash flow will look like. This will help you avoid running out of money and getting into a tight spot with creditors. Your budget will also show you where you can make savings.

Setting a budget isn’t complicated but it can still help to involve an expert. We can double-check the numbers and help you test scenarios and make realistic predictions about business growth, upcoming expenses, and tax exposure. We can also advise you on what to do if the actual numbers deviate from the predicted ones.

Contact your WDF Professional team member if you would like to discuss further how we can help you with setting a budget for your business. Phone 02 6921 5444 or email accountants@wdf.com.au