How to Build a Budget: Ultimate Guide for Business
There are many things to consider when you run a business – from the daily operations and long-term business strategy to, of course, a budget.
Budgeting isn’t just about bookkeeping. Without a budget, you’ll have no idea how your business is performing, whether you’re at risk of financial failure or whether you’re on track to achieving your financial goals.
Below, we’ve outlined the different types of budgets and why you need one.
You’ll also find a free budget template at the bottom of this article.
What is a budget?
A business budget is an outline of your business’s income and expenses. It references your capital, spending and helps anticipate your future revenue.
Why you need a budget
In a time when businesses are struggling to keep afloat, it is incredibly important to set a budget.
Most individuals and businesses struggle to set a budget because it’s hard to predict the future – but setting a budget can help give you security that you otherwise wouldn’t have.
There plenty of benefits to having a robust budget, including:
- Having a guide you can easily refer to, helping you plan how to spend money and factor in what money is coming in.
- Having the financial work taken are of, so you focus on your long-term goals and vision for your business.
- Not spending money that you don’t have – a key accounting principle is not to count money until you have received it, and not to spend money until you have it.
- Giving yourself a buffer and help you reduce un-necessary expenditure. When you cut expenditure, you will be in a better position to create an emergency fund for the periods when business is slow.
- Gives you the ability to get a clearer picture of why you are not achieving your targets, and most importantly when you review it allows you to consider the “why”, the “why did this happen and they “why” did this not occur.
Setting a budget reduces the likelihood that you will experience a short term money crunch – which ultimately gives your business much-needed security.
What are the different types of budgets?
There are many different types of budgets, with each of them serving a different purpose.
- Master budget – a master budget is a combination of smaller budgets created within the organisation. It takes data from financial statements and forecasts plus the financial plan. A master budget is used by management to help them plan their business goals. Senior management in large organisation creates several versions of the master budget before they finalise it. When the budget is finalised, it is then used for specific business purposes. Think of this like the overarching budget, the consolidated budget if you have department/ oper budgets, they all roll up into one overall budget.
- Operating budget – An operating budget projects the organisation’s revenue and expenses or a specified period of time. It is similar to a P&L report and contains fixed costs, variable costs, capital costs and non-operating expenses. It is basically a summary report but includes additional details. Management creates an operating budget at the start of each financial year.
- Cash budget – Cash is essential to run a business successfully. Without good cashflow, you can’t make purchases. Therefore, a cashflow budget is possibly the most important budget you can create. It will help you identify whether or not you have enough cash to operate and if your money is being used productively or if there are areas you can cut spending or increase your operating cash.
- Financial budget – A financial budget helps you understand how much capital your business will need to support your short- and long-term goals. It will factor in the business’s assets, liabilities and equity, which are very important for your balance sheet. The financial budget will let you know your business’s overall financial health.
- Labour budget – The labour budget is an assessment of how much you spend on your workforce. It includes the number of staff or contractors you require to achieve your business goals. You can plan regular and seasonal staffing expenditure and work out how much revenue each team member brings into the business.
- Static budget – A static budget remains fixed throughout the year and is an estimate of your expenditure and revenue. You can line the items in the budget so you can identify when you have met your business goals. Static budgets are generally used by government agencies, educational institution or non-profit organisations who have been allocated a fixed amount of funding in a financial period.
What should you include in your budget?
It is essential that you follow the right steps to create your budget. The first step to take is knowing what to include in your budget. We’ve provided you with a guide to help you get started.
You revenue – i.e. how much money you have coming in before costs – is incredibly important. You will obviously need to know how much money you expect to come in the future, so you can plan your expenditure.
If your business is older than a year, then you can make the assessment based on the revenue from the previous year.
Things like rent, mortgage/utility payments, salaries, internet and insurance are fixed costs that a business pays regularly.
It is important to factor these expenses into your budget so you can put aside the funds to cover the costs.They are also a good place to start if your business has financial issues, and you need to downsize or reduce expenditure.
Variable costs include goods or services that have fluctuating prices like fuel, for example.
If you require fuel to produce your product or service, then you will need to factor that into your prices or budget accordingly if you don’t pass the costs onto your customers.
When you’re first starting a business such as a taxi company, you may have one-off costs like a new vehicle or if your computers need replacing then that is one off expense.
It is difficult to predict these expenses, but you can try and estimate them based on previous budgets. Some business owners also automatically set aside a percentage for unexpected costs.
A cash flow budget records the money coming in and out of your business. You can get a feel for it from your previous financial records including financial statements and receipts.
It’s important to know when money is coming in and going out of your business so you can plan accordingly. Knowing the busy and quiet periods in your business will help guide you on when to make big purchases and when to reduce spending.
Everyone is in business to make a profit. The profit is the number you get after subtracting your costs from your revenue.
When your profit increases, it means your business is growing and that is a good sign.
You can use your profit budget to estimate how much profit you are likely to make the next year.
Then after you know what your profit is you can decide if you are going to use the money on marketing, expansion or cash reserves.
Review your budget periodically
Just like you wouldn’t get in your motor car without knowing where you are going, you need to have a plan for your business. That’s essentially what a budget is.
Doing your budget once is not going to help you in the long run. Lots of small businesses don’t develop a budget, or if they do then they don’t review it periodically and that can cause issues. It is no different to a household budget.
Business isn’t always steady. It can fluctuate dramatically so you need to review it. If your revenue is $50,000 one month, but $200,000 another month,thenthe average may be $125,000. You will need to plan for the quiet months accordingly.
Reviewing your budget periodically helps you tackle this challenge. Ultimately, you should review your budget annually – but if you really want to get ahead of your finances, then consider reviewing your budget twice a year. When you review your budget you should consider:
- Existing assumptions
- Anomalies in the data
- Your cash position
The length of time it takes to review your budget will depend on the nature of your business.
If you are unsure where to start, then download one of our free budget templates or give us a call and we’d be happy to help you out.Our accounting services can help you develop the right long-term budget to help you achieve long-term success.