Six tips to help you budget successfully in business
If you’re a business owner thinking of cutting back on costs this year or saving money to invest into other areas of business, there is no better time than now.
Nicola McCartan, Chartered Accountant and Tax Manager with our team at M.B. McGrady & Co. has some top tips to help you budget successfully in 2022.
Every good financial plan will begin with a budget. Here’s a few tips to help you get started
1. Forecast your income
The lack of planning and control of cash resources is the reason often given for the failure of many businesses. By undertaking good financial forecasting businesses can help reduce this business risk.
Your first order of business is finding out exactly how much money you have coming in each month. Make sure that you have accounted for any tax payable or other deductions to establish your net income. Once you know how much you have coming in throughout the year, you’ll be able to identify what income you have each month, which brings us on to expenses.
2. Calculate your outgoings
Take the time to plan and note down your outgoings each month. You probably have more regular outgoings than you expect! Recording your net income, followed by all of your monthly outgoings, e.g. property rent/lease/mortgage, office costs (phone, internet, heating etc.), salaries, employee benefits, mileage, travel expenses, this will enable you to identify essential and non-essential spends and get an idea of where your money is going each month. This will make it easier to highlight areas where you can reduce or eliminate spend.
3. Set sales goals
By subtracting your monthly outgoings from your profit, you can determine whether you have excess money to save or whether you need to first identify ways to reduce your outgoings. Consider the profit margins each of your sales will achieve and be realistic — a budget isn’t truly effective if it’s designed toward a targeted number.
Rather, you should develop your goals based on past results and future projections. Analyse financial results from up to five years ago as a starting point. What are some costs that are fixed and inevitable? Then you can look at accounts or line items that have fluctuated more drastically over the years. What caused this fluctuation? Were there one-time expenses? Can these fluctuations be controlled? Using past information and adjusting for predicted variances helps provide a more concrete basis for establishing sales goals.
Setting sales goals keeps your team motivated, your momentum going strong, and investors and co-founders happy.
4. Cashflow is King
Cashflow is King and you should prepare and maintain a cashflow forecast which can be updated weekly, to provide an accurate outlook for the next six to 12 months. Setting targets is a superb way to ensure it is given the attention required and provides a level of satisfaction and ownership to hit and beat these.
5. Be aware of financial relationships
This is where one cost is related to another – It’s like going to the shop and buying a flashlight. You have to pick up batteries, too, right?
As a result, sometimes you have to be careful changing one line item of your budget without analyzing that change’s effect on other items. For example, if you find out that you are going to increase your workforce by 10%, instead of simply increasing the payroll line item by 10%, you will want to increase employee benefits, payroll taxes and other items directly related to payroll.
Similarly, if you think you can just bump up your bottom line by increasing sales by 10%, don’t forget to also increase variable costs related to sales (e.g., costs of goods sold, taxes and freight).
6. Be realistic and flexible
Be realistic about what you can save and aim to stick to your budget the majority of the time. Unexpected expenditure such as maintenance or repair will always arise, and unforeseen circumstances such as staff sickness, all mean more outgoings. But, if you’re sticking to your budget for most of the time, you should be able to make some savings that will help you to reach your financial goals, whatever they may be, and manage any short-term unplanned spending as they arise!
Budgeting doesn’t need to be painful. For many, the simple act of taking a close look at outgoings and spending can prompt a change in habit that leads to immediate savings and when it comes to budgeting and saving, it all adds up!
The covid pandemic has demonstrated that having a rainy-day fund is a huge benefit in business for unforeseen circumstances. Having an additional account to build up a ‘safe/spare fund’ will give your business a security blanket and cash reserve that can help you through tough times or help you grow when the time is right.
When times are good, put what you can into the account, and help it grow over time!