Budgeting is essential for every business, no matter how big or small. Think of your budget as your financial blueprint, enabling you to make better informed decisions, allocate resources effectively and manage cash flow.
Your budget provides the benchmark when evaluating your businesses’ performance, and enables you to prepare for future growth. To budget most effectively, you should be aware of the different types and the purposes they serve, so let’s get into it.
The Different Types of Budgets
Operating Budget
Operating BudgetAn operating budget is a projection of a business’s revenue and expenses over a specific period of time. It covers the expected income from day-to-day operations and the associated costs, acting as a financial roadmap of sorts for business activities.
It usually includes:
- Revenue
- Variable costs
- Fixed costs
Capital Budget
A capital budget focuses on the long-term, outlining large investments such as equipment and technology purchases or upgrades. This helps to plan for large expenditures and assess the return on investment.
Cash Flow Budget
A cash flow budget estimates cash in and out over a specific time period, designed to ensure the business maintains liquidity.
Master Budget
A master budget combines the individual budgets into one master document, providing an overview of the businesses finances. This serves as the central financial planning document.
Quarterly vs. Annual Budgets
An annual budget provides a long-term view of a business financial plan, which is essential for strategic goal setting and large expenditures, whereas quarterly budgets are separated into three four-month periods. Quarterly budgets allow for more frequent monitoring and adjustments, providing a closer look at the immediate future; which can also help to identify and mitigate potential risks early. However, a quarterly focus can lead to a narrower perspective.
Many businesses employ both; using the annual budget as a framework for long term goals, highlighting where resources are best allocated. Quarterly budgets can then be implemented within the framework of the annual budget, allowing for short-term adjustments and performance tracking.
Creating Your Budget Step by Step
- Set Out Your Goals
Defining your goals from the outset will help to optimise your budget planning. When outlining your goals, ensure that they are SMART – Specific, Measurable, Achievable, Relevant and Time-bound. Budget goals can be related to revenue, profit margins, cost reduction or expansion.
- Collate Financial Data
Next, you’ll want to collate all the relevant historical financial data and market research. Historical data includes past income statements, balance sheets and cash flow statements.
This should be compiled alongside industry benchmarks, to compare your business to industry standard, and market trends that could impact your business’ financial health.
- Estimate Revenue
Once you have your financial data at the ready, you can project your revenue, including any expected growth or potential new revenue streams. It’s important to consider all scenarios; best-case, worst-case and most likely.
- Identify and Categorise Expenses
Expenses can be split into three categories: fixed, variable and one-time. You should assess how each of these will impact the budget as business operations change.
Fixed Costs: Rent, salaries, insurance, regular utility bills
Variable Costs: Raw materials, shipping costs, marketing
One-Time Costs: Equipment purchases, software upgrades, marketing campaigns (e.g. for a new product launch)
- The Budget
To create your budget, list all projected income streams under revenue, in one section, and expenses in another section. Expenses should be itemised by the categories outlined above. It is crucial that total expenses do not exceed projected revenue.
The net profit can be calculated by subtracting total expenses from total revenue. Once you’ve finalised your budget, monitoring performance, by comparing the estimated figures with actual, can help in swiftly identifying and addressing any variances.
Top Tips for Budgeting with Limited Income
- Identify all initial start-up and core costs, and cut any non-essential expenses that don’t add immediate value
- Project your revenue based on realistic sales forecasts, be sure to consider market size, pricing strategy and sales channels
- Clearly differentiate between fixed and variable costs to manage expenses effectively
- Create a cash flow statement to ensure you’re able to cover the day-to-day running of the business
- Set aside a contingency fund
Struggling with your small business budget? Let’s have a chat.