Budgeting 101: A practical guide for business owners
As a business owner, creating a budget is one of the most important steps you can take towards financial success. A budget is a financial plan that outlines your projected income and expenses for a given period of time, typically one year, but you can make the budget for longer or shorter periods if needed.
A budget helps you keep track of your finances, identify potential areas of financial strain, and ensure that you have enough cash flow to cover your expenses.
Here is why you should create a budget and provide practical tips from the team at Affinity Accounting on how to do it.
Why create a budget
Plan for the future
A budget enables you to plan for the future by setting financial goals and allocating resources accordingly. You can use a budget to plan for long-term expenses such as purchasing new equipment or hiring additional staff. Creating a budget also lets you see how larger expenses will affect your finances in the future.
Manage cash flow
A budget helps you manage your cash flow by projecting your income and expenses for the coming months or year. This allows you to identify potential cash flow shortages and take steps to avoid them. For example, you can see how a projected slower season in late spring affects your finances in early summer, enabling you to take steps to increase your profitability or cut costs in anticipation of the downtime.
Identify potential issues
A budget can help you identify potential issues such as overspending, undercharging, or unexpected expenses. By monitoring your actual income and expenses against your budgeted amounts, you can quickly identify potential issues and take corrective action. You may be overspending in certain areas of your business, but not be aware of it until you look at all the numbers together.
Track progress
A budget enables you to track your progress towards your financial goals. By regularly reviewing your budget and comparing it to your actual income and expenses, you can determine whether you are on track to meet your financial objectives. If you aren’t on track, you can take important steps to get there.
Improve decision-making
A budget provides a framework for making informed financial decisions. By having a clear understanding of your financial situation, you can make decisions that will benefit your business in the long run. You’ll see how certain decisions affect your financial health and can run your business based on data, not on gut feeling.
How to create a budget
Here are some easy steps to creating your budget. If you have completed an annual business plan, we recommend using this as your foundation document.
Start with your income: Begin by estimating your projected income for the upcoming period. This should include all sources of income, such as sales revenue, interest income, and any other sources of income.
List your expenses: List all of your expenses, including fixed expenses such as rent, salaries, and utilities, as well as variable expenses such as inventory, marketing, and supplies.
Group your expenses into categories: Group your expenses into categories such as rent, utilities, salaries, marketing, etc. This will help you identify areas where you may be overspending or where you need to allocate more resources.
Set financial goals: Set financial goals for your business, such as increasing revenue, reducing expenses, or increasing profits. Your budget should be aligned with your financial goals.
Allocate your resources: Allocate resources to each category of expenses based on your financial goals and projections. Make sure to cover essential expenses and allocate resources accordingly. If your priority is to grow your business, you’ll need to put money towards that growth. That money may have to come from other categories.
Monitor and adjust: Monitor your actual income and expenses against your budgeted amounts and adjust your budget as necessary. Regularly reviewing your budget and making adjustments as needed will help you stay on track towards your financial goals.
Use budgeting tools: There are many budgeting tools available that can help you create and manage your budget. These tools can automate many of the budgeting processes and make it easier to track your income and expenses.
Creating a budget is essential for every business. It provides a framework for managing your finances, setting financial goals, and making informed financial decisions. By following these practical tips and regularly reviewing your budget, you can ensure the financial success of your business.
If you have any questions about setting up your budget, allocating your resources, or anything else to do with your finances, Affinity Accounting is here to help. Get in touch with our Wellington accounting team today to find out how we can help you build a thriving business.
Affinity Accounting is a Wellington accounting, tax and advisory firm serving clients across New Zealand.
What our clients say
“We are so happy we’ve found a business accountant in Wellington that is approachable, professional, proactive and really takes the time to explain in a no judgement way how we can meet our obligations and improve our business finances. We highly recommend Affinity Accounting to any of our friends and contacts.” - Steph Adriaansen-Fink