budgeting for small business

How to create budgets for small business

Victoria Scally Budgeting, Business Tips, Limited Company, Startup

Has your business has been running for a year (or a couple of years)? Do you want a better handle on how you can start to build a budget for your small business to work from? 

You’ve most likely worked your way through trials of a few different support services, software and suppliers to help you along your journey.

Sales are starting to build? What complexity might you have to deliver those sales, or indeed to find new business?

Setting a small business budget

A budget can help you visualise what you expect to have to spend for every sale or new business that comes in. It will also help you understand what you might be able to afford to do even more.

Now we use the term ‘budget’ here; really we mean a very basic understanding of your ‘ins and outs’.

The format of a small business budget can vary, but we suggest a simple spreadsheet as a good start, with 12 columns, one for each month, with your income and expenses listed at the side.

In an ideal world, you would want a combination of a budget and a cash flow forecast to really help plan your growth. Here we just chat about how to put a budget together.

 

1. Look at what’s coming in

After a couple of years, you will probably have a reasonable sense of how much is coming in. Or at the very least what you should expect to come in.

Familiarise yourself with your previous years ‘P&L’ (Profit & Loss). 

Are there any particularly good months? 

What about traditionally quieter months?

If it’s really difficult to know each month, you can always average the year out across each month. So if you expect your sales to be £120,000, then you can work to £10,000 a month. 

Remember if you are VAT registered to ignore the VAT element.

2. Look at what’s going out, regularly

AKA Fixed costs.

The basics you spend month to month, on a regular basis to keep the lights on.

Maybe it’s your website hosting, Microsoft office, maybe it’s literally how much you pay to have the lights on.

You’d be surprised as you grow how many of these costs don’t instantly come to mind when making a list, so check a bank statement!

It’s also a good time to review them during this exercise.

If in doubt, always overestimate here.

When dealing with staff costs, don’t forget to add Employers National Insurance and pension contributions.

The easiest way to do this if you don’t have exact figures is take your gross (before tax) salaries for your team and then apply 13.8% for an Employers NI estimate, and 3% (currently) for pensions.

This will be more than the true figure due to some people not being enrolled, Employers Allowance (for NI) etc, but will give you a worse case to work with if you don’t have exact figures.

If you are VAT registered, remember to only use the ‘net’ (after VAT) cost.

3. Did you make a profit?

With the basic in/outs all sorted you should now see if you’ve made a profit.

Bear in mind, we haven’t accounted for tax here, but in our experience the simpler the budget the better from an initial planning point of view.

If you are a limited company, for a rough tax bill you could take off 19% of the profit figure. 

4. What’s next?

Think about the costs you’ve just seen.

Maybe amongst these costs they are some ‘nice to have’ software packages that can be paused? Perhaps just scaled back depending on what your customers need?

Make a note!

This is a good time to then pencil in some things you’d like – a short term wish list if you will. Maybe you need to spend a little bit on marketing, but don’t need a full blown marketing budget for your small business just yet?

Do you need to invest in new computer equipment (talk to us about the tax treatment of these), some new office furniture, or other big, one-off items? 

Add your estimate in the relevant months.

The other good thing to do after working out your profit, is then take away any loan repayments you have (as these are being paid out of your profit).

This will give you a good idea on how much the potentially have left for you as the owner….

5. So now what?

If the incoming, less the outgoing, doesn’t give you as big of a profit as you’d like for the year, decide where to split your time and energy.

Costs too high? Then consider what’s really fixed and what could be scaled back.

Leftover time to find new business (and deliver on that new business), without increasing your costs? Go for it!

Haven’t the time for new business, but can offer value-add to your existing customers? Perhaps you could review your pricing.

Often a small tweak to your pricing can make a difference to your ‘margins’ and profit without the need to cut costs. Sometimes it’s very difficult to cut further without a drastic change to your business model.

Of course there are software tools that can help with all this, but as we mentioned, in our experience, simpler is better.

With this simple small business budget, you should now be armed with a basic knowledge of your numbers.

Peace of mind that in theory you do make a profit (and knowing how much), or sadly a loss, will really help make good financial business decisions.

Good luck with the growth!