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Budgeting is all about allowing for the future, but to make a truly effective budget it’s all about how well you analyse the past. Creating an accurate budget allows businesses to identify and allow for seasonal fluctuations in income; in turn, establishing either their need to reduce costs or their ability to reinvest.

Understanding all the components that contribute to forming a budget can be complicated and at times, overwhelming; so we have broken it down into six simple steps to get you started:

1. Calculate the Entire Revenue


This means the gross income prior to any deductions. Don’t forget to include all income streams your business may have, for example, earnings from:

  • Sales
  • Interest
  • Subscriptions
  • Dividends
  • Renting/Leasing

2. Calculate Fixed Costs


Fixed costs are the necessary expenses that your business incurs on a regular basis (it may be weekly, monthly or annually). Examples include:

  • Salaries
  • Rent
  • Tax
  • Insurance

3. Estimate Variable Costs


Variable expenses will vary in amount and frequency. Analysing past variable expenses allows businesses to more accurately estimate future costs. Examples include:

  • Utilities (Electricity, water, etc)
  • Casual wages and owner’s salary
  • Office supplies
  • Marketing expenses
  • Commissions
  • Travel costs
  • Shipping costs

4. Determine Profit & Loss


After collating the above data, you will be able to calculate the difference (ie. profit or loss) by subtracting the total expenses from the total income. Breaking it into a monthly calculation will not only simplify the process but enable you to create a budget that takes into consideration seasonal trends. This offers businesses the opportunity to reflect on their goals and pricing and adjust accordingly.

5. Ascertain What Your Budget Will Be


By analysing whether your business is making a profit or a loss and by how much, you can better plan for the future. If your business is making a profit, you may be able to increase invest and expand your business. If your business experiences losses, you can formulate a cash flow plan and concentrate on regularly setting aside funds for unexpected expenses.

For help creating a cash flow statement, please see the free template below on the Australian Government website:
https://business.gov.au/finance/accounting/how-to-set-up-a-cash-flow-statement

6. Establish and Monitor Your Budget

In order to succeed, it is imperative businesses continue to refer to their budget and assess their financials on a regular basis. Utilising account-keeping software such as Xero or Quickbooks is an excellent way to simplify this process and collate data more efficiently.

For assistance with improving business processes, increasing profit, analysing financials or debt consolidation, be sure to contact the experienced team at Wisdom Business Consultants here today.

References

deBara, D. ‘Create A Small Business Budget In 5 Simple Steps’, freshbooks.com, online, 2021, https://www.freshbooks.com/blog/the-5-step-plan-to-creating-a-balanced-business-budget (Accesses 7 June 2022)