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Running a business

Why Effective Business Budgeting Creates A More Profitable Company

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Table of contents

    What is business budgeting?

    Simply put, a business budget is a plan for your company's spending based on its income and expenses. It helps predict revenue by taking a look at your available capital and estimated spending while helping you set financial goals for your business and measure actual performance against them.

    Sometimes it’s easy to get lost in the differences between a forecast and a budget. But just remember that technically a budget is still a forecast because it makes a prediction of your finances over a specific period of time. 

    When it comes to your business, you need to know where every penny is coming from and where they’re being spent. A budget can help you outline where your business will spend money over the next week, month, or year, to help you make better decisions to help your company grow.

    While you may still be managing your books manually, tools like Crunch exist to automate the accounting processes that you may be wasting valuable time on. Using specialised software for activities like bookkeeping, CIS, payroll, pension auto-enrolment, and more, can save you in the long, and short-run!

    Why does a business need a budget?

    Have you been looking for a way to reduce debt? Have you been trying to increase opportunities to find investors or secure loans? This is where having an effective business budget can help. 

    A budget plays an important role in determining start-up and operating costs, estimating revenue and expenses over a specific period of time, and driving important business decisions. Besides just keeping on track financially, business budgets can help to:

    • Manage cashflow
    • Allocate resources
    • Measure performance
    • Meet objectives
    • Improve decisions
    • Identify and mitigate risk
    • Create future plans

    No matter the size or age of your company, a business budget is an essential part of the business plan and is key for setting up a new company. 

    What are the different types of business budgeting?

    There are a few different types of business budgets that companies make use of to accurately predict their numbers. Some of these include, but aren’t limited to:

    • Master budgets
    • Static budgets
    • Operating budgets
    • Cashflow budgets
    • Financial budgets
    • Sales budget
    • Capital budgets

    Master budget

    A master budget includes projections for items on the income statement, balance sheet, and cashflow statement. These can include your: 

    • Revenue
    • Expenses
    • Operating costs
    • Sales
    • Capital expenditures 

    This budget combines individual budgets to give you an overall financial outlook and is more common for larger businesses because they help managers see how their budgets fit into the company’s overall financial plans.

    Static budget

    Some industries use static budgets as a starting point or a baseline, similar to the master budget. This is when managers use economic forecasting methods to determine realistic numbers, estimating revenue and expenses that will remain fixed throughout the year.

    Operating budget

    As its name suggests the operating budget focuses on the operating expenses, including the cost of goods sold (COGS) and the revenue or income. This includes overhead and administration costs but not items like capital expenditures and long-term debt. This budget outlines the funds a business needs to operate efficiently.

    Cash flow budget

    These types of budgets can help you check your past performance to see what's working and what isn’t… then make adjustments from there. You may find you need to adjust things like short-term working capital lines of credit, flexible account payment options, etc.

    This budget can help you make key financial decisions, identify possible shortfalls, and curb unnecessary spending.

    Financial budget

    A financial budget provides details about your company’s assets, liabilities, and equity. This gives you an idea of your company’s financial stability and can be a valuable tool when looking for investors or when looking to sell. 

    Sales budget

    Sales budgets can give you details on projected revenue, expenses, and estimated sales during the budget period. This can help you plan for meeting the demands expected from your customers in the future. 

    Capital budget

    Capital budgets help you in planning for larger purchases or costs. For example, planning for machinery, vehicle, or property purchases. This type of budget will outline the cost of the asset, the payback period, and the potential return on the purchase. 

    What makes an effective business budget?

    A good budget will be able to give you a clear picture of the company's financial standing at any point in time. It should also be flexible enough to allow for changes in your circumstances. Typically, most businesses calculate their budgets once a year and arrange them by months or quarters, but you should do what makes the most sense for your company. 

    As a new business, the first budget you create may be tricky to get right. However, it’ll be a great learning experience and will help you better understand what works best for your business. While an initial budget will possibly make use of several assumptions or educated guesses to get it started, the best place to begin is by knowing the basic elements that make up a budget and go from there. 

    Estimated revenue

    Your estimated revenue can be based on the previous year's numbers (or industry averages if the business is a startup).

    Fixed costs

    These will indicate regular, consistent expenses that don’t fluctuate based on an increase in revenue. For example, these could include:

    • Rent
    • Utilities
    • Insurance
    • Accounting services
    • Legal services
    • Equipment leasing
    • Bank fees

    Variable costs

    Variable costs could be anything from salary costs, production of goods costs, amounts that fluctuate based on revenue, etc. 

    Once-off costs

    Often, once-off costs are startup costs to serve a specific goal. These could include:

    • Moving expenses
    • Equipment
    • Software
    • Furniture
    • Research costs
    • Launch costs

    Cashflow

    Cash is king and your company's cash flow should be monitored weekly, or at the very least, monthly. For instance, a positive cash flow means that there is an influx of funds coming into your business over a set period vs outgoing funds.

    Profit

    Your company's profit margin reflects the difference between your revenue and expenses. Monitoring this will allow you to see if your company should reconsider their pricing, boost advertising, etc. 

    Useful budgeting tips for your business

    Every business needs to think about the unique quirks of their industry and business type when creating their budgets - yours is no different. 

    While effective budgets typically have the same frameworks, there are distinct differences in budgeting for some of the major industries that you'll need to take into consideration. 

    Here are a few tips to keep in mind when creating a budget for your business:

    • Involve your employees
    • Don’t underpay yourself (read our guide on Paying Yourself When Self-Employed)
    • Define and understand your risks
    • Overestimate expenses
    • Pay attention to your sales cycle
    • Remember that time is money, too
    • Constantly revisit your budget

    Business budgeting considerations for industry types

    Seasonal businesses

    Because seasonal businesses aren't consistent each month, budgeting for these differences can provide a good view of your past and present data to help predict your future cash flow. By forecasting in this way, you can spot annual trends, finances needed to get through slow seasons, and opportunities to cut or offset costs.

    Ecommerce businesses

    When it comes to eCommerce businesses, you’ll need to pay attention to budget items like different packaging types, varying shipping rates, cost of goods sold, warehousing costs, duties, etc. 

    Inventory businesses

    To effectively budget for your inventory business, you’ll need to take a look at the previous year's sales or industry benchmarks to take the best guess at the amount of inventory required. 

    Also, this will need to be taken into account when calculating the cost of goods sold because you’ll need to factor in any upfront costs. By stocking up early, you may be able to negotiate certain shipping costs, get discounts for bulk orders, etc. which you can also factor into your budget.

    Service businesses

    In a service business, your budget would change based on the number of people required to provide the service and the cost of their time. These figures may change based on ever-changing customer demand, specific times, etc. 

    Specialised tools like Brixx can help you plan your financial forecasts and statements for your industry's unique needs. This can help your business save valuable time and resources by automating key processes that can help you make smarter business decisions. Read more about Crunch’s integration with Brixx and sign up for free to try Brixx Free.

    If you’ve had enough of juggling spreadsheets and never finding the right invoice, your business needs Crunch’s free accounting software, whether you are a freelancer, sole trader or limited company. We are the UK’s most cost-effective online accounting service, with an award-winning Customer Service team and Chartered Certified accountants.

    We have no hidden fees, no limitations and no trials, but a wide range of accounting software features that help you easily manage your business. If you need more information, you can talk to our expert online accountants, payroll experts and even VAT specialists.

    Is it time for your Self Assessment? The Crunch team can also complete and file that to HMRC for a one-off fee. We have a powerful online system and fully-trained accountants to relieve you of stressing about those numbers.

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